Growth stocks vs income stocks: the pros and cons

Every investor eventually faces the classic question: should they focus on growth or income stocks? It’s a debate as old as the stock market itself, and while there’s no definitive answer, it largely depends on an investor’s goals and time horizon.

Growth stocks aim to build wealth through share price appreciation, while income stocks prioritise regular cash returns through dividends. Both have their place – but they also carry their own risks and rewards.

Growth stocks

Growth stocks are often found in sectors such as technology, healthcare and finance. These are companies reinvesting heavily into their businesses rather than paying out dividends.

The goal is to expand earnings and revenue over time, and the rewards can be huge. Historically, growth stocks have outperformed income stocks over longer periods – but they’re also more volatile and can be hit hard during market downturns.

One company I think is worth considering for growth is 3i Group (LSE: III). It’s one of the FTSE 100’s quiet success stories, rising an astonishing 787.6% over the past decade. The investment giant focuses on private equity and infrastructure, and its numbers tell a powerful story.

Return on equity (ROE) stands at 22.5%, showing strong efficiency in generating profits from shareholders’ funds. Over the past 12 months, revenues grew by over 50% while earnings increased 31.2%. Its balance sheet looks solid too, with equity of £24.61bn against just £1.24bn of debt.

That kind of growth profile’s hard to ignore, but there are risks. Much of 3i’s success relies on its ability to pick winning investments in uncertain markets. A slowdown in private equity deal-making or weaker returns from its infrastructure arm could dent profitability.

Still, with a proven track record and financial strength, I think it’s a stock that growth-focused investors might find interesting.

Income stocks

Income stocks, on the other hand, are all about stability and cash flow. These are the favourites of passive income seekers – businesses that generate consistent earnings and share a chunk of profits as dividends.

They tend to operate in mature industries where growth is steady but limited, such as insurance, utilities and consumer goods. Prices often remain relatively flat, but the income stream can be highly attractive, especially during uncertain markets.

A strong example is Admiral Group (LSE: ADM). The insurer has one of the most reliable dividend track records in the FTSE 100, with several decades of uninterrupted payments. It currently offers a healthy 7.22% yield, with dividends accounting for around 87% of earnings and covered by cash 1.6 times. Profit margins remain strong, and the business is consistently profitable.

The key concern however, lies in its balance sheet. Debt slightly outweighs equity, and any significant rise in claims or insurance regulation could put pressure on payouts. But for investors seeking dependable income, I think Admiral’s a stock worth weighing up.

Why choose?

In reality, there’s no need to pick a side. Growth stocks can significantly enhance long-term returns, while income stocks offer a steady stream of income and stability.

A diversified mix of both often delivers the best of both worlds – growth for the future and income for today.

The post Growth stocks vs income stocks: the pros and cons appeared first on The Motley Fool UK.

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Mark Hartley has positions in 3i Group Plc and Admiral Group Plc. The Motley Fool UK has recommended Admiral Group Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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