Long-term investing: how to combine income and growth - J.P. Morgan Asset Management

Long-term investing: how to combine income and growth

Contributor J.P. Morgan Investment Trust Team


Here’s some good news. Investors don’t have to choose between income and growth. Smart savers looking to grow their assets over the long-term can diversify and invest for both.

Income and growth styles

Investments can be split into two broad groups: income and growth.

As the name suggests, income investments are focused on shares paying a decent dividend - or on other assets such as bonds that pay a regular income.

They’re often sought by older investors who might perhaps use this income to supplement a pension. But they appeal equally to younger people, who can reinvest this income to boost overall returns.

A common way of comparing the income is to look at the yield from an individual investment. If you bought a share for £100 and it paid a dividend of £3 a year, this would be a 3 per cent yield.

Investment trusts or funds aiming for growth, however, are more focused on capital appreciation and rising share prices. They tend to invest in companies that pay low or no dividends.

Typically, growth stocks are younger companies that will reinvest profits in growing the business, rather than paying them out to investors through dividends.

In contrast, income trusts or funds tend to concentrate on larger well-established companies that have mature profit streams. These include utility providers, oil and gas companies, pharmaceuticals and some financial institutions.

As with any investment, though, past performance can’t reliably tell us about future returns. If a company runs into financial difficulties, it may reduce or stop paying dividends. This happened to many banks after the financial crash of 2008.

The importance of diversification

It can pay to hold both growth and income stocks in your portfolio, particularly if you are investing for the long term. This can lead to a more diversified spread of assets and help reduce volatility.

We know there is a huge appetite for income from investors. This is why we have introduced a dividend policy where we aim to pay at least 4 per cent a year.

Portfolio Manager Jeroen Huysinga

For example, during a stock-market bull run it is often growth stocks that outperform. Think of the rapid share-price appreciation of technology companies during the dot-com boom running up to 2000.

However, in periods of weaker economic growth, when share prices make little headway, investing in companies paying reliable dividends can help boost the value of your savings.

Following the stock-market crash of 2000, it took 15 years for the FTSE 100 to regain its previous peak. You might think it would be difficult to make money in such markets. But those who stuck with the stock market and reinvested their dividends made a 52 per cent return over this period.

Income plus capital growth

It is possible to blend these styles and invest in trusts or funds that offer a twin-track approach. Such vehicles invest in income and growth shares, in effect allowing investors to cover both bases.

Many of these funds and investment trusts will aim to invest in companies that have potential for capital growth, as well as to provide a decent income. This helps investors grow their money over time.

For example, if you have a share yielding 3 per cent and its share price rises in value over five years, the amount investors receive will also increase (because they are getting 3 per cent of a larger value).

Remember investors can choose to withdraw this income, which can be used to cover day-to-day living expenses, or reinvest it to boost future growth.

Investment trust options

A number of investment trusts are set up as income and growth vehicles. JPMorgan Global Growth & Income plc is an investment trust that aims to deliver long-term capital appreciation as well as pay quarterly dividends.

Portfolio Manager Jeroen Huysinga says: “We know there is a huge appetite for income from investors. This is why we have introduced a dividend policy where we aim to pay at least 4 per cent a year.”

But he says that this hasn’t changed the philosophy of the trust, which is to look for international companies that it believes offer the best potential for growth. “That is not just in the years ahead, but over the next few decades.”

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JPMorgan Global Growth & Income plc - Key risk information

  • Exchange rate changes may cause the value of underlying overseas investments to go down as well as up.
  • Investments in emerging markets may involve a higher element of risk due to political and economic instability and underdeveloped markets and systems.
  • Shares may also be traded less frequently than those on established markets. This means that there may be difficulty in both buying and selling shares and individual share prices may be subject to short­term price fluctuations.
  • Where permitted, permitted, a trust may invest in other investment trusts that utilise gearing (borrowing) which will exaggerate market movements both up and down.
  • This fund may use derivatives for investment purposes or for efficient portfolio management.
  • External factors may cause an entire asset class to decline in value. Prices and values of all shares or all bonds could decline at the same time, or fluctuate in response to the performance of individual companies and general market conditions.
  • This trust may utilise gearing (borrowing) which will exaggerate market movements both up and down.
  • This trust may also invest in smaller companies which may increase its risk profile.
  • The share price may trade at a discount to the Net Asset Value of the company.

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