Different investors have different goals. Some are focused on income stocks in order to generate a second income. Others want capital appreciation via rising share prices, so they look for stocks with high growth potential. I like a mix, and with some spare money right now, I’m wondering where the best place is to put my money at the moment.
The case for growth shares
Buying growth shares could be more attractive than income stocks in the current market environment due to shifting macroeconomic dynamics. We’re in a position in the UK where the economy is stabilising and interest rate cuts remain on the horizon. Historically, in such situations, growth stocks tend to perform very well.
The boost from lower interest rates means that debt becomes more affordable, allowing such companies to fuel growth more quickly. Lower rates and a stable economy give consumers greater confidence to make purchases, thereby pushing demand higher.
Further, growth companies are exposed to hot themes right now. This includes things such as AI, cloud computing, and renewable energy. By contrast, income stocks are typically concentrated in more mature sectors such as utilities and real-estate investment trusts (REITs). So if my focus is on the areas of real growth in the economy, I can see where I should be allocating my £2k.
However, the risk with growth stocks is that capital growth isn’t guaranteed. Of a handful of interesting companies, only one may succeed and take off. If I pick the wrong ones, I could significantly underperform the broader market return.
The case for income stocks
One of the key reasons why income shares are appealing is that the dividends can provide a more consistent source of income. Of course, a business doesn’t have to pay out dividends. However, many stocks have a strong track record of consistently paying out funds over many years.
For example, consider Assura (LSE:AGR). The REIT specialises in primary care medical properties and boasts an attractive dividend yield of 6.71%. More than that, it has 12 years of consecutive dividend growth.
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One reason dividends have been consistently paid is the nature of the business. The core business model is to own healthcare properties and lease them to NHS-backed tenants on long-term, inflation-linked contracts. As a result, it creates stable cash flow and revenue streams. This ultimately means the management team can be confident in making payments out to shareholders.
Of course, the business isn’t perfect. One risk is the sensitivity to interest rates. With inflation moving back higher, the Bank of England committee may need to keep rates higher for longer. This could negatively impact Assura, as the debt associated with the properties is tied to these higher rates.
Overall, I think income stocks like Assura are more appealing to me right now, and I’m thinking about buying it. I like the stability of the dividends. Even though some growth shares can be great, I think I need to be careful right now in being selective and not buying overvalued options.
