As the annual Stocks and Shares ISA deadline nears, I have been thinking about how best to invest my ISA. Some investors follow a growth strategy, while others focus on income. How can I decide whether growth or income would be better for me?
Here I explain what the two approaches mean – and how I would decide what to do with my ISA.
What are growth and income investing?
There is no hard and fast difference between growth shares and income shares. For example, a share like Cranswick offers me the prospects of business growth as well as dividend income.
But in general, investors tend to define shares as being either mainly about growth or income.
Companies in fairly new industries are often seen as growth plays. Or they may have an established business but continue to see strong growth in demand. So a growth share might be a company developing a new product, like Tesla. But it could also be a company in an established industry breaking into new markets, such as JD Sports. Such companies may prioritise reinvesting profits in growing the business over paying dividends.
By contrast, income shares are often in mature businesses with limited new spending opportunities. So they are able to use a substantial part of their profits to fund dividends to shareholders. Examples include tobacco companies such as Imperial Brands, gas companies like Diversified Energy, and insurers such as Direct Line.
Business model not share price
One thing that people sometimes misunderstand about growth shares is that the name refers to their business model. Just because a company has growth opportunities does not necessarily mean that its share price will also grow. Sometimes, growth companies can be valued so highly that their share prices fall even while the business is growing.
Similarly, an income share may see share price growth even if the business is not growing much. Many income shares are in fairly defensive areas, and so come in and out of fashion depending on market trends. That can push the share price up – or down. But one thing I like about income shares is that a falling share price can actually be an opportunity for me. If the dividend remains the same, a falling share price means I can get a higher yield for the same money. As a buy-and-hold investor, that can boost my passive income streams over the long term.
Is growth or income best for me?
So choosing growth or income styles of investing could help me orient my portfolio more towards opportunities in growing businesses, or income streams from proven businesses. I could also allocate my portfolio using both strategies. For example, I could put 80% of my ISA in income shares and the remainder in growth picks.
Partly my decision is shaped by my investment objectives and timelines. If I am tucking money away for decades hoping to benefit from new businesses, a growth strategy might fit my aims. But if I want to generate income to meet more immediate spending needs such as club dues, school fees, or holiday costs, I may focus more on income.
Whether I choose growth or income as my main focus, I would seek to reduce my risk by diversifying across a range of shares.
