Some investors focus on generating income from their investments. Therefore they often focus on buying FTSE 100 dividend-paying stocks. Others look for high-growth companies, which sometimes neglect paying out income in order to reinvest and grow even more. But you don’t have to sacrifice one for the other. You can buy into stocks that pay income but also have good growth potential. I’d look to invest here, even with other assets (such as gold) performing strongly.
The gold rush
Why would I discount the gold price performance, I hear you cry? It’s been on an astonishing rally over the past year, up 35%. It’s broken through the $2,000 per ounce mark for the first time in the process. Some are forecasting for it to rise to as high as $2,500.
Yet have you stopped to think why gold is rallying so much? One of the main reasons is the lack of opportunity cost by investing in gold right now. You see, gold pays no dividend, no income. So when interest rates are high, often the gold price falls. Investors would rather look to Cash ISAs, FTSE 100 dividend stocks, or other places. But with interest rates are at multi-year lows, people instead pile into gold. This seems like a good idea when comparing gold to investing in a Cash ISA right now. But it’s less valid when looking at stocks for income.
FTSE 100 dividend-paying stocks
It’s true that the FTSE 100 average dividend yield has fallen somewhat. But it still sits at a very reasonable 3.7%. So I’d be picking up 3.7% more income via a bunch of FTSE 100 stocks than a gold bar. If you want to increase your risk slightly, you can push this average higher. By increasing your allocation to stocks such as M&G, Legal & General and Standard Life Aberdeen, this yield increases to over 5%.
During an uncertain time when many are looking for income, FTSE 100 dividend-paying stocks make sense to me over gold. Dividends are often paid on a semi-annual basis, so that’s income regularly paid straight into your bank account. But what about if you’re looking for growth as well?
Getting both income and growth
If you can get growth along with income, this again makes investing in gold less attractive as it ticks both boxes. You have to be more selective here, but there are still options. One I like at the moment is GlaxoSmithKline. There’s the potential for growth in the share price given the research and effort going into finding a vaccine/treatment for the coronavirus. Any breakthrough here could see good upside potential, as has been seen already from the rally in the Synairgen share price.
On top of the growth potential, GSK is still paying out dividends, with a yield around 5.1%. For me, this is an example of getting a balance between both income and growth via a FTSE 100 stock.
I do appreciate that allocating a small amount of your funds to a gold ETF does make sense, but for the most part I’d stick to stocks. This is especially true when you don’t need to make a trade-off between growth potential and receiving income.
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jonathansmith1 has no position in any of the shares mentioned. The Motley Fool UK has recommended GlaxoSmithKline. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.