Growth versus income investing: the basics

When you invest, there are two main ways to aim for returns:

• grow the value of your investment over time, or
• receive regular payments from it.

In investing terms, that’s the difference between growth and income. While the idea sounds simple, the way each approach works - and how returns are delivered - can shape your portfolio in very different ways.

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What is growth investing?

Growth investing focuses on companies that are expected to increase their profits faster than the wider market.

Instead of paying out most of their profits as dividends, these companies often automatically reinvest their profits with a view to increasing their value over time. This, in theory, pushes up their share price.

Growth investments can be more volatile. That means their price may rise and fall more sharply. If a company delivers strong results, its share price can rise quickly. But if results disappoint, it can fall just as quickly.

Growth investing may suit those who don’t need a regular income, have a longer time horizon and are comfortable riding out market ups and downs in pursuit of higher long-term returns.

What is income investing?

Income investing focuses on companies that regularly pay dividends. A dividend is a payment a company makes to shareholders from its profits.

These companies are often more established and generate steady cash flow. Instead of reinvesting their profits, they pay a portion to investors.

However, income investing isn’t risk-free. Dividends can be reduced or cancelled if a company’s profits fall. Share prices can also drop, which may reduce the value of your investment.

Income investing may suit you if you’re looking for regular payments from your investments. You can take this as income or reinvest it to buy more.

Growth, income and fund share classes

When you invest in a fund, you’ll often see it listed as either an ‘accumulation’ or an ‘income’ share class.

An accumulation share class automatically reinvests any income back into the fund, helping your investment grow over time. 

An income share class pays out income, which you can choose to take as regular payments or reinvest yourself.

The underlying investments are usually the same. The difference is how the income is treated.

• Read: Accumulation versus income funds? The basics

Which approach might suit you?

There isn’t a universally ‘better’ option. The right choice depends on what you want your investments to do for you - now and in the future.

Key questions to consider include:

• Do you need to take money from your investments, or can you leave them to grow?
• How long are you investing for?
• How comfortable are you with market ups and downs?

Remember, your overall return (often called your total return) comes from both changes in value and any income paid. Many investors use a mix of growth and income investing to balance these elements.

Your next step

Neither approach is risk-free. But understanding how they differ can help you build a portfolio aligned with your goals, whether that’s long-term growth, regular income, or a mix of the two.

As always, the value of investments and the income from them can go down as well as up, so you may get back less than you invest.

• Read: 7 investing rules of thumb
• Read: What risks come with investing? The basics
• Read: Want to invest but don’t know where to start?

Important information - investors should note that the views expressed may no longer be current and may have already been acted upon. Please be aware that past performance is not a reliable indicator of future returns. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice. .