The Income Strategy
Investors love dividends. Many academics and financial professionals are not too fond of it. Income investing is a strategy that focuses on generating a steady stream of income from investments. In the Australian Securities Exchange (ASX), income investing involves investing in companies that pay dividends to their shareholders. Dividends are a portion of the company’s profits distributed to shareholders. Companies that pay dividends are typically well-established and have a history of stable earnings.
Larger companies on the ASX tend to have more stable share prices than smaller companies. This is because larger companies are generally more established and have a more predictable earnings stream. As a result, investors are more confident in the long-term prospects of these companies and are less likely to sell their shares in response to short-term market fluctuations. It’s important to note that this is a general trend, and there are always exceptions.
While income investing can be a great way to generate a steady stream of income, there are some potential downsides to consider:
- Lower growth potential
- Interest rates sensitivity
- Dividend cuts or adjustments to franking credits
- Inflation risks
- Tax implications
The Growth Strategy
A growth strategy for share trading aims to achieve share price growth at a rate higher than inflation. It favours shares that are likely to see strong capital growth rather than paying dividends. This usually involves buying and selling securities with the aim of making a profit. Traders typically hold securities for a shorter period and aim to profit from short-term price movements as growth shares move through cycles. They seek to invest in these company types in their early stages, expecting they will see strong growth.
The investor expects to receive a higher return in the form of capital growth. While growth investing can be a lucrative investment strategy, there are some potential downsides to consider:
- Higher Volatility
- Low to zero dividends
- Riskier and less predictable
Depending on how often you trade in and out of companies, it may also mean you are a trader. Investors and traders are subject to different tax rules, which can significantly affect their tax obligations. In our upcoming article, ‘Share Trader vs Share Investor,’ we will explore how the ATO ruling applies under tax law and its impact on your tax.
Conclusion
While Income Investing offers the allure of a stable income from less volatile shares, it is crucial to recognise the opportunity costs associated with excluding other investments that may contribute to higher returns in your portfolio. Understanding your goals and objectives, personal circumstances, where you are in the investment cycle, age, and many other factors will determine if Income Investing is right for you. This is when speaking to a licensed adviser who can provide personal advice can really pay dividends in the long run.
Written by
Alastair Kennelly
The information provided is of general nature only and does not take into account your personal objectives, financial situations or needs. Before acting on any information provided, you should consider whether the information is suitable for you and your personal circumstances and if necessary, seek appropriate professional advice. All opinions, conclusions, forecasts or recommendations are reasonably held at the time of compilation but are subject to change without notice. Investments can go up and down. Past performance is not necessarily indicative of future performance.
