To work toward achieve your long-term goals, such as a
comfortable retirement, you’ll need to invest in growth stocks.
Yet, you may be leery of the investment risk posed by these
vehicles – after all, the stocks with the greatest potential for
growth also carry the greatest potential for price volatility. So,
what can you do? For one thing, you can consider adding some income
to your growth.
To work toward achieve your long-term goals, such as a comfortable retirement, you’ll need to invest in growth stocks. Yet, you may be leery of the investment risk posed by these vehicles – after all, the stocks with the greatest potential for growth also carry the greatest potential for price volatility. So, what can you do? For one thing, you can consider adding some income to your growth.
Specifically, you may want to invest in income-oriented stocks – those that pay dividends to shareholders. The prices of income-producing stocks will certainly fluctuate, but generally not as much as the prices of growth stocks.
One of the best ways to mix income-oriented stocks in with your growth stocks is through growth-and-income mutual funds. As the name suggests, the primary objective of these funds is to grow your principal, with a secondary goal of providing income. Typically, these funds pay dividends on a quarterly or semiannual basis.
When you invest in growth-and-income funds, you receive some key benefits:
- Diversification – As is the case with all mutual funds, growth-and-income funds are made up of dozens, or even hundreds, of individual securities. Growth-and-income funds may contain a diversified array of high-quality domestic and foreign stocks, corporate bonds and government securities. By spreading your investment dollars over these different vehicles, you can help protect yourself against market downturns that may affect one asset class particularly hard.
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Professional management – When you invest in a growth-and-income fund, you automatically get the services of an experienced team of investment professionals. A portfolio manager makes the day-to-day “buy” and “sell” decisions, relying on a variety of resources to maximize the performance of the fund. And financial analysts evaluate the suitability of all stocks and other investments that go into the fund.
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Liquidity – You can sell your shares at the current net asset value on any business day. (However, this value may be more or less than your original purchase price.)
Many people who invest in growth-and-income funds don’t actually need the money for their cash flow. Instead, they reinvest the dividends back into the fund.
Should you follow this dividend reinvestment plan? It depends on your individual needs. Reinvesting dividends is certainly a great way to build up more shares in the funds you own. However, at different stages in your life, particularly in retirement, you may want or need to take the dividends to supplement your income. In any case, dividends are now more attractive than ever. The maximum tax rate on dividends is now 15 percent, following the passage of tax law changes in 2003. Previously, dividends were taxed at your individual income tax rate.
Brad Ledwith is an investment representative for Edward Jones in Morgan Hill. His column appears every other Friday.
