As an investor, you’re always balancing objectives. You want to garner some stability and hedge risk. You want to grow your investment capital. You want to maximize your total returns. You want to hit the sweet spot.
There are plenty of ways to get there; your investments can generate results for you in various ways. Think about capital appreciation, cash flow, rent payments, growth, income, and dividends. The list goes on. While each is separate and distinct, these factors all contribute to the bottom line: your total returns.
When we talk about investment goals and total returns, it makes sense to get back to investing basics. Your total returns are equal to the growth plus income that your investments realize. This is a fundamental, straightforward formula, but the individual elements are a little more nuanced. For example, some people think of growth and income as static values. They’re not – they exist on a continuum.
Let’s delve into our formula and its components more deeply. First, let’s take a look at growth. When we talk about growth, we’re referring to how your investment asset is appreciating in value. For example, you buy a stock in Acme Corporation for $10 and in a few years it’s worth $20. Straightforward, right?
Turning to income, once you start investing you quickly realize that income comes in all shapes and sizes. You generate income as a stock dividend, as bond interest, or through receipt of a distribution from, say, a real estate investment trust. No matter what form income takes on, it all boils back down to the basic question of how much income we’re receiving on our investments.
In essence, the equation investors seek to solve is made up of two very important factors. While the formula itself appears simple, how you make it work for you may not. But the good news is that there are some specific strategies you can adopt to keep your portfolio healthy.
First, keep it simple. These days, the world of investing is rife with financial jargon, but you don’t have to speak another language to understand investing. Keep your eyes on the total returns equation and the factors of growth and income, and you’re well on your way.
Consider this income-producing scenario – you own a rental property primarily for the purpose of steady monthly rents. Collecting rent, or income, from this property is the primary component of your investment total return. Period. Sure, there will be (and should be) appreciation of the property over time, or growth, but this value is subject to increase or decrease any given year. The appreciation is highly unpredictable when compared to the steady stream of rental income you may collect for years.
Dividend paying stocks function much in the same way. People own dividend-paying stocks for that quarterly dividend check. They’re predictable and they’re steady; folks could own the stocks for years, or even decades, and see nothing but consistent income (and slight increases) over all that time. Case in point – there are several dividend-paying companies that haven’t missed a dividend payment in over 100 years. Companies like Proctor and Gamble, Colgate, and Exxon Mobil Corporation have made their dividend payments, and made them on time, for over a century.
Just like with most areas of life, when it comes to investing, we live in a very unpredictable world. But it is possible to hit a sweet spot and make steady progress towards all your investment goals – stability, income, growth – by carefully deploying your investments along that beautiful continuum between growth and income.
*Originally published here.