When deciding which shares I should buy, hold or sell, I find it helpful to have an investment strategy.
This doesn’t need to be complicated. In fact, I prefer a simple approach. It helps clarify my thinking. And a broad set of guidelines to bring focus to my investment objectives can help keep me on track.
A lot of investors aim for income or growth. But I like both, and a hybrid version as well.
Income or growth: the difference
There are no hard and fast rules about what is an income share and what is a growth share. For example, some shares offer income but also growth. Financial services provider M&G offers a dividend yield over 8% — but has grown 50% over the past year.
Broadly speaking, the income vs growth theory is as follows. In its early growth stages, a company reinvests any profits in expanding its business. It does not pay dividends, but fast revenue growth could help boost the share price. S4 Capital is an example of such a company – revenue last year grew 60%, but there is no prospect of a dividend for now.
As a company matures, its opportunities for growth may slow down. The company could use some funds to grow, but it often starts to pay out more of its profits as dividends. In this middle stage, I would see the share as both a growth and income pick, like M&G above.
Finally, as a company or industry matures, investment opportunities are limited, but free cash flow could be high. Sometimes, such a company will expand into new end markets and become a conglomerate. But often it will simply pay out a lot of its profits as dividends. This is a classic income share. Tobacco is an industry that shows this in practice. British American Tobacco shares have lost 5% over the past year, but their payout is currently over 7%.
I consider all three approaches when putting my investment strategy into action.
Investment objectives
One consideration when I choose shares is whether I want or need income. If using shares as a form of passive income, I may be more attracted to income shares. But if I am willing to tuck money away for years with no expectation of a direct payout, growth shares could help me benefit from sectoral trends or business shifts.
Dividends are never guaranteed. Even for income shares I buy as part of my investment strategy, I pick them in the hope that I will get passive income. In reality I may not, which is one reason I diversify across different names to try and spread my risk.
Balanced investment strategy
In practice I try to have a mixture of growth and income shares as part of my investment strategy.
I like growth shares as they give me an opportunity to get in near the ground floor of what I see as promising businesses. However, young or growing companies without proven business models might end up not being as successful as I hope, or not working out at all.
That’s one reason I usually also allocate a sizeable portion of my portfolio to more established income shares. While my expectations for capital growth with such shares are more modest, the possibility of passive income can reward my investment.
