When most people think of investing, they tend to picture someone buying a security at one price and then selling it later on a higher price for a profit. This is only one aspect of investing however, and it's known as investing for capital gains. The other side of that coin is investing for income.
Income investing is a very straightforward strategy where the focus is on securities that pay dividends/interest. This can include dividend paying stocks, bonds, REITs, MLPs, and other types of securities. The income investor has one of two goals in mind, which is to either take the dividends and spend it or use the dividends to reinvest back into the same income-producing asset and tap into the power of compounding. Many of the biggest stocks in the world are used for income investing, which includes blue chips such as Proctor and Gamble, Johnson & Johnson, and Coca Cola just to name a few.
Capital gains investing is based on the old "buy low, sell high" principal. As far as stocks go, this type of investing is done primarily through what is known as growth stocks, which are companies that pay no dividend and instead use their profits to reinvest back into the growth of their own company instead of returning cash to shareholders in the form of dividends payments. Examples of such companies would be Google, Tesla, or Facebook among many.
Which One Is Better?
There isn't exactly a universal answer here, as investors will subjectively value certain goals more than others. Some investors will always view capital gains investing as their highest priority while others would rather stick with focusing on a stream of income.
My own view is that most people should NOT be investing for capital gains and should focus on income instead. The reason being is that it's much easier for the average investor to use income investments to create a compounding machine instead of accurately timing stock picks. The professional stock pickers on Wall St. can't even pick the right stocks consistently, so for the average person to try and to do is rather foolish.
I'll have much more to say about stock picking in the future so please considering following me if you found this article interesting. Thanks!
*This post is not intended to be considered financial advice. This is for informational purposes only.
Sources:
http://growthinformer.com/income-investing-strategies-explanation-working
http://www.frankcurzio.com/fang-stocks-fall-out-of-favor-but-dont-bottom-fish-here/