What Are the Risks Associated With Investing in an Income Stock Vs. a Growth Stock?
Risks in either growth-stock or income-stock investing have differences and similarities. Understanding different forms of risk helps to clarify the behavior/objective of either asset class, and provides for clearer investment decisions.
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Riskless Investments
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In the securities industry, the only riskless investment to make a comparison to is the U.S. Treasury Bills. With maturities of less than one year, it pays a modest interest income return.
Risk
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Risk comes in the form of outright failure of an investment (business risk), volatility (market fluctuations), and the failure to achieve an investment objective (inflation risk), among other examples.
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Income Stock
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Older, stable companies in industries that have matured are examples of income-oriented stocks. They no longer experience rapid growth. Rather, they have a solid stream of consistent earnings, have no need to reinvest in all their earnings and can pay much of their cash flow to shareholders in the form of dividends. Their share prices tend to be less volatile than growth stocks.
Example: A, T & T (T)
Growth Stocks
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Young companies in rapidly growing industries are typical of a growth stock. Earnings are generated at a high rate, and corporate profits are reinvested to promote further growth. These companies rarely pay dividends, offer the greatest return potential and are also the most volatile. One example: Apple Computer (AAPL).
Dividends
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As a rule, income stocks that pay consistent, rising dividends at a meaningfully greater rate than the overall market are most desirable to an income stock investor. A dividend that is abnormally high, however, can be cause for concern---the dividend may not be sustainable and the company may be distressed.
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