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Running head: Growth and Income Stocks

Growth and Income Stocks

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Mike Essary

Date: 11/20/07

Growth and Income Stocks

Everyone understands the advantages of growth investing. Bet on a company with a hot new technology or a great retailing idea, and as the business expands, the share price will soar. Growth and Income Funds seek to combine long-term capital growth and current income. These funds invest in the common stock of companies whose share value has increased and that have displayed a solid record of paying dividends. Income investing is also easy to get. Buy shares in a company that may not have a lot of growth potential but that throws off a lot of cash and you'll be able to live large on dividends. But what exactly is a growth-and-income investment? And what specific advantages does it offer? The definition is easy enough: A growth-and-income stock has moderate but solid prospects for earnings growth and also offers a yield somewhat higher than the S&P 500. The advantages of such stocks are not as obvious as for pure growth or pure income investments. But analysis shows that such stocks offer an excellent balance between long-term returns and reduced risk. They also help to keep you ahead of inflation. With today's low taxes on dividends, it doesn't matter whether your return comes from capital gains or income. A stock with 10 percent earnings growth and a 3 percent yield figures to return just as much as a stock with 13 percent earnings growth. Pure growth stocks also tend to trade at high price/earnings ratios. They aren't likely to benefit much from further multiple expansions, but their P/Es can collapse if there's unexpected bad news. Growth-and-income investments, by contrast, are likely to be undervalued, relative to their return prospects. And an out-of-favor stock with an average P/E can rebound if its prospects improve. In short, growth-and-income investments offer excellent long-term return potential that is often unappreciated. And they are likely to be less risky.

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A growth and income fund is a mutual fund structured to provide both growths in value and current income payments. A growth and income fund will likely choose small-cap stocks for growth and large-cap stocks for income. Bonds are sometimes included heavily in a growth and income fund as well. The risk level of a growth and income fund is moderate and is therefore acceptable to investors who have a moderate risk tolerance. Managers of a growth and income fund will often research companies that show both growth and income together in the same security. Many mutual families (i.e. Fidelity, Vanguard, Janus) offer a growth and income fund. A growth and income fund may also be called a total return fund.

Thus far, we know that an individual stock is essentially a share of ownership in the underlying company.  However, as we saw previously when discussing Mutual Funds, that there are various types of equity mutual funds that seem to designate various types of stock.   A thorough knowledge of these various classifications and their defining factors will help you in choosing one appropriate for your portfolio.  They are all unique enough that the performance in any one can vary greatly when compared to another. Though the number of stock classification is large and can be daunting to the new investor, most will fall into one of four basic categories.  For the purposes of our review we will focus on each of those categories and give relevant examples of a stock falling into that category.
Income stocks are very popular with retirees or other investors seeking to maximize income through dividend payout.  Utilities are probably the most popular type of income stock and as a whole they have a very reliable track record of paying out dividends on a regular basis.  Other companies or segments may also pay out dividends regularly and they too would fall into this classification. A growth stock is usually defined as a company with incredible growth potential because of market, product, segment or situation.  Examples would be a company that manufactures some special pharmaceutical exclusively that is necessary to fight an emerging disease.  Obviously the growth potential for that company is enhanced by this situation. 

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A growth fund invests in the stocks of companies that are growing rapidly. Growth companies tend to reinvest all or most of their profits for research and development rather than pay dividends. Growth funds are focused on generating capital gains rather than income.
An income fund stresses current income over growth. The funds objective may be accomplished by investing in the stocks of companies with long histories of dividend payments, such as utility stocks, blue-chip stocks, and preferred stocks. Option income funds invest in securities on which options may by written and earn premium income from writing options. They may also earn capital gains from trading options at a profit. These funds seek to increase total return by adding income generated by the options to appreciation on the securities held in the portfolio.

Ideal for investors who have several years before retirement, but who want to develop consistent income in the meantime, growth and income funds are just one of the many mutual fund options available to you. Take a closer look at these funds and learn where you can buy them and how to manage them effectively.

Growth and income options are more risky than income options but less risky than growth options. They tend to appeal to investors who seek a balance between pursuing growths while trying to keep investment fluctuation at a reasonable level by also seeking investment income. Growth and income investors accept the reality that in order to pursue some level of investment growth, they need to absorb some investment risk in order to achieve their investment goals.

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Resources

Pensions & Investments;International: Overseas stocks still attracting pension funds; Fixed income shows stronger growth, but comes off a much smaller asset base.(The P&I 1,000)  Jan 24, 2005.

Stan Hinden; A Plan for Growth and Income; Despite the Downturn, Planners Say Stocks Should Figure Large in the Equation The Washington Post; Apr 1, 2001.

 
 


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