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Income or Growth?

'Income' or 'Growth' ? is probably not a great question.  Ideally you would like both from your investments.

Income refers to the dividends, distributions or interest payments that you receive from an investment.  Growth refers to the increase in value of an investment.  As an example, if you purchase a rental property the income from that property is the stream of rent that you receive from the tenant.  The growth from the property comes if you sell the property for a higher price than you purchased it for. 

Quite often the focus seems to be on the growth that investments achieve.  The media and dinner conversations seem to be far more focused on properties that have increased dramatically in price or share prices that have gone through the roof, rather than those investments that have paid a continuously increasing stream of income over time. 

As I write this Commonwealth Bank shares (CBA) are trading at about $44.  10 years ago they were trading for $10.  So, the growth in the shareprice has seen people quadruple their money.  Surely this has been the main benefit in owning CBA shares?  No doubt this is a great benefit.  10 years ago, in 1996, any one who had $10,000 invested in CBA would have received $900 in dividends from their investment.  In 1997 they would have received $1,020.  In 1998 $1,040.  In 1999 $1,150.  In 2000 $1,300.  In 2001 $1,360.  In 2002 $1,500.  In 2003 $1,540.  In 2004 $1,830.  In 2005 $1,970. 

Over the 10 years of owning Commonwealth Bank shares you would have received far more in dividends that you paid for them initially.  Sure you would be happy that they had more than quadrupled in price, however you would also have enjoyed spending the increased dividend that you received each year.

Flight Center shares floated around 10 years ago for $1.00.  They are often referred to as a growth stock, and indeed trade at about 10 times their initial price.  However their dividend payments have been attractive as well.  If you invested $10,000 in the company at the float, you would have received $10,100 in dividends in the year of 2004 alone.  Part of this was a special dividend - however the reality is that you would have received more than your initial investment in dividends in that one year.  In 2005 Flight Center announced that they were struggling somewhat, and some restructuring of their business would need to take place.  Stock prices fell and there was conjecture about how strong their business was.  However, even during this lumpy time someone who invested $10,000 in the float would still have received a dividend of $5,050.

Of course growth and income are not mutually exclusive.  An investment with a steadily increasing income stream is also likely to grow in value. 

I think that it makes a deal of sense to think about the income returns from your investments.  This income received can be invested in further assets or, at retirement, can replace your earned income.  John Burr Williams was an American finance academic in the 1930's.  He came to the conclusion that 'a stock is worth the present value of all the dividends to be paid upon it, no more, no less'.

He wrote a poem to highlite his thinking:

'A cow for her milk, / A hen for her eggs, And a stock, by heck, / For her dividends.

An orchard for fruit, / Bees for their honey, And stocks, besides, / For their dividends.'

Growth and income are concepts that often separate speculators and investors.  Speculators are often focused on price, looking to buy an asset that they will be able to later sell at a higher price.  Investors are often focused on income, looking to buy an asset that will provide them with a strong and growing income stream, whether it be dividends from shares, rent from a property investment or interest from a cash or fixed interest investment.

So the moral of the storey?  Don't discount income when you are thinking about investment returns.

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