Should you prioritise capital growth over income generation?

 In this post, we will look at the following:

• What capital growth is?
• What it means to invest for income?
• And why you may want to prioritise income over capital growth in your wealth building journey.

If you would rather not read the post, feel free to watch the video below, which explains everything shared here:

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Of course, what is shared here is for infotainment purposes, and should not be construed as financial advice. These are just ideas that you should consider in the way you build your wealth based on where you are in your journey, what investment resources are available to you and what your appetite is.

Alright, let’s get it

Let’s start by defining what we mean by capital. According to the dictionary, one of the definitions of the word Capital reads thus: wealth in the form of money or other assets owned by a person or organization or available for a purpose such as starting a company or investing. For the sake of what we want to talk about, we will define capital as the spare cash that you have on hand to invest.

So what does it mean to invest for growth?

When you invest for growth, you are looking to increase the value of your capital and it may not be easy or expedient to take money out of your investments until a set period.

On the other hand, you can invest assets that will generate a set amount of income, while preserving the invested capital.

To illustrate:

Let’s say you invest in Google shares. Assuming you invested in Google shares on February 14, 2020. You would have paid about USD1520 per share. If you had held those shares till now, you would not have received any dividend but the value of your shares would be worth USD2680 by April 4, 2022. This means that your capital has grown by 76% over the period from February 14, 2020 till April 4, 2022.

Of course, you would not have received any dividend from that time. And it can be argued that you could have sold some of those shares to generate some income for yourself. But if you had sold some of those shares, then the value of your capital would definitely have been less than the 76% growth over the same period, as the shares of Google have goon up and down in price over the period.

However, if you had invested the same amount in the Credit Suisse X-Links Gold Covered Call ETN ($GLDI), you would have received a total of USD377.44 (or 24%) in income over the same period and the value of your investment would pretty much have been the same.

Let’s talk about other factors that to consider with the two investments.

As you can see from the Google share price chart. There have been times where the value of the shares dropped sharply. If you had panicked, which is what a lot of investors do at such periods, you may have sold of your shares and recognise a loss.

However, because your mind set in investing in $GDLI is to produce steady income, you will probably not panic if the price drops because you have conditioned your mind to be in the investment for the long run. And you have reason to do so: the income being generated. It is kind of like staying at a well paying job. Only in this case, you don’t have to show up to an office. Other people are doing the work for you.

Of course, the more money you have to invest, the more income you are able to generate. And if you are not spending that income, you can reinvest it to even increase your capital growth to get you to a point where you can live off the income.

Of course, you can also invest in assets that can pay you both some income and provide capital growth. For example, you can invest in Kayne Anderson MLP Investment company ($KYN) which has seen a steady growth in value from USD3.50 in 2020 to USD9.17 and has consistently paid dividends since then.

So what do you think? Should you be investing for capital growth or for income? Leave a comment and share your experience below.

In our next post, we will explore the use of options as a tool for generating income on your shares portfolio. 

Thanks for stopping by.

See you soon!