Growth Stock or Income Stock?

Events for the past one month

Coronavirus epidemic, announcement of Singapore’s Budget 2020, the craze of “Crash Landing on You”, and the volatility of the stock markets. All these have caused quite a stir at the start of 2020.

“Crash Landing on You” has become the 2nd highest ranking drama in South Korean cable television history, a romance story surrounding a South Korean heiress with a North Korean army captain. It’s #1 on Netflix. I will not go into details on this but looking at the hype, you can understand why the era of streaming has become such a central stage for many behemoth companies like Apple, Amazon, Disney, Hulu, Netflix etc. People in the near future will want to have the convenience of watching their favourite show at the click of their fingers. This emerging trend of streaming deserves another blog post on its own. As mentioned in my earlier post, Connected TV (CTV) is a massive opportunity for companies in the advertising arena such as The Trade Desk.

What is an Income Stock?

Let’s get back to my main topic of the day. Growth stock or Income stock? For those who are unfamiliar with these jargon, let me start off with income stock first. When a company stop expanding in a substantial manner in terms of revenue growth, the growth is more or less tied to the country’s economy growth. Usually it will return the excess cash (outside business needs) to the shareholders through dividend payout which is one of the common way to return value to shareholders. This method of payout is called dividend. If a company doesn’t grow and expand, naturally there would not be much upside to its share price since performance of a firm often determine its stock price in the long run. This is what we call an income stock.

What is a Growth Stock?

A good example of a growth stock is a new start up who has just established itself. Imagine a small provision shop has a revenue of $100K and needs to double up its revenue. Assuming that it has no difficulties in starting another shop, a 2nd shop will double its revenue ideally. From there, opening another 2 shops will double its revenue again, and so on. You get the idea. Therefore, a small startup has its advantages in growing its business size, and this in turn will increase its share price as well. This type of stock often does not payout dividend because it needs cash to grow its operations and expand its business.

Why will shareholders buy or hold onto these stocks?

The answer lies in the share price appreciation for these stocks. Shareholders will get tremendous value once they cash in on their stocks which usually rises in tandem to the company’s performance or potential market size.

What is your risk profile?

There is no right or wrong answer on choosing which type of stock to buy. I believe a good portfolio should have a combination of the 2 types but the question lies in which type should have more weight and how much. It depends on one’s needs and personal risk profile. Age will be a good guide for this explanation. If you are retiring and need regular income for your daily expense, I would think a portfolio with more weightage on income stocks will make more sense for you. However if you are younger like me (haha) and still wish to build up nest eggs for your retirement, it is better to build your investment portfolio with more growth stocks.

An illustration (VICOM vs WDAY)

I invested in VICOM (SGX: V01) in 26 Aug 2015 at the entry price of $5.797. On 28 Feb 2020, the current stock price for VICOM is $7.91. Total dividends collected per share since 2015 is $1.659.

The sum of the current share price and dividends collected divided by the entry stock price minus one = 65.1% gain.

Paper gains from VICOM after 4-5 years.

On the other hand, I invested in Workday (NASDAQ: WDAY) on 05 Jul 2017 with a share price of $97. On 28 Feb 2020, Workday’s share price stands at $173.25.

Current share price divided by entry stock price = 78.6% gain. Workday does not pay dividends to date.

Workday’s percentage gain on the stock price after 2-3 years.

It may seem similar until you look at the date of stock purchase!! Workday being a growth stock is expected to increase more quickly than an income stock like VICOM.

Note that the currency does not make a difference here. If I have a sum of money say $1000 USD (US dollars) = $1400 SGD (Singapore dollars). It doesn’t matter which market stock I choose, either US stock in USD or SG stock in SGD.

What is my recommendation?

Remember growth stocks come with higher risk as well. Stock price tends to swing up and down a lot more for growth stocks. I have my fair share of growth stocks that dropped significantly from my purchase price. So what am I trying to show here? In fact, if you held a few multi-bagger stocks over a long term, you will have a much higher return on your investment compare to income stock based portfolio. This is evident for both me and my wife’s portfolios. She is lucky that she listened to me back in the early days of our investment journey lol…

I did not take into the account of the different brokerage fee, exchange rate, inflation etc but these shouldn’t affect much if you holding on to stocks like Netflix. So far, growth stocks have work so much better for me and my family. Besides that, I still have a long way to my retirement and I can afford to take more risks.

Which do you prefer – Income or growth stocks, and why? Let me know!

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