Lux Investing

What is growth and income investing?

Public Comments

1. growth investing refers to investing is growth stocks, stocks whose earnings are expected to grow faster than the average stock. In the past such stocks have included Microsoft, Intel, Cisco, McDonalds, Best Buys, etc. The idea here is that if the company's earnings are growing rapidly, then there is a good probability that the stock price will also grow rapidly. The main problem with such a strategy is the price that one might have to pay for such stocks. Occassionally, these stocks tend to sell at very high prices relative to their earnings as happened during 1999-2000. If you had invested in many of the companies back then, you would still be showing a loss 8 and 9 years later. Intel for example was selling for about 100 a share then. Now it is 23 a share. Best Buy was selling for about 38 a share. Today it is about 45 a share. So even though growth investing can produce outstanding returns, one has to be very careful choosing the price one pays relative to the earnings of the company. Income investing is investing is stocks that pay dividends and have a record of increasing their dividends. Companies in this category include many bank stocks that currently pay more than 5% dividend and some more than 6%. BBT, BAC are a couple. Also in this category would be included limited partnerships and REITs which by law have to pay out almost all of their earnings as dividends. PAA, ETP, and CLI would be three that fall into this category.
2. Growth is where your investment grows and the profit of the company is retained to help its growth rather than pay out to shareholders. Whereas an income investment is a company that pays a lot of its profit to shareholders by way of dividends. Traditionally this would be something like a utility company, where the growth is limited.
3. To put it most simply: Growth investing is investing for growth firms in capital gains. The most growth I've seen is Google (GOOG) b/c of a high EPS ratio. Income investing is investing for income-generating firms in the form of dividends. The highest dividend rate I've seen is Terra Nitrogen Company (TNH) as of 2008. However, either investment isn't w/o risk so be careful.