Is “growth of income” a better strategy than “growth for income” for 2021?
What’s an investor to do as we look forward to 2021?
What a year 2020 has been for investors as the market set new records. With the Covid-19 pandemic spreading worldwide, the Dow Jones Industrial Average set its worst single-day point drop ever when it fell 2,997 points on March 16. Buoyed by news of promising virus vaccines, the market shot up and, for the first time, passed 30,000 on November 24. What’s an investor to do as we look forward to 2021?
Think about your personal financial goals. If you’re like most people, you are investing to generate income. Whether you need that income today or in the future, most people invest with the belief that doing so will provide, maintain, or improve their income.
There are two common but very different approaches to this. First, there’s the Growth for Income strategy, where upward individual stock growth generates income. The second approach is the Growth of Income strategy, which focuses on dividends as the vehicle for generating revenue.
The Growth for Income strategy ties your income directly to the performance of the market. You buy your desired asset (stocks, bonds, gold, real estate), trust that their value will improve over time, and then sell the asset when the price has improved using the proceeds for income.
Think of this approach as similar to an egg producer selling her chickens. As the number of chickens decline, there are fewer eggs for her to sell. It becomes a downward spiral, eventually leading to asset depletion. Inflation is another factor to consider. At a mere three percent inflation rate, the prices of food, fuel, and living doubles every 24 years. If your income has not doubled over that time, your standard of living is lower, and for many retirees, this is a problem.
What can be done to protect income and grow it at a rate that outpaces inflation?
A Growth of Income can not only act as a hedge against inflation but provide income without selling assets. By investing in solid companies with a track record of consistent dividends, you get to focus on income, not price appreciation. Companies such as Colgate, 3M, Coca-Cola, and Clorox all have a history of paying and adding to their dividends. As in the egg producer example, dividends paid are like revenue from the sale of the eggs. The chickens lay the eggs that generate income.
A Growth of Income approach may just be a better strategy than a Growth for Income.
As we look forward to 2021, I recommend focusing on your income, not your portfolio value. When you receive your investment account statement look at your income line instead of your total asset value. Did your income improve, stay the same, or go down? By following the longer Growth of Income strategy, you’ll avoid the wild swings of the market while growing your income. Over the long-term, you may find you have more choices, which may provide greater freedom and security.