Self-directed retail investors choose to invest in global and local equity markets for various reasons.
Whether that goal is building generational wealth, retiring comfortably, or generating passive income streams, understanding the difference between income investing and total return investing is an important distinction.
Income Investing
When it comes to income investing, the main goal is not necessarily to grow capital as fast as possible, but to generate enough income to fund a lifestyle or pay down a purchased asset.
Investors generally achieve this goal by building a portfolio of shares that produces regular cash flow through regular dividend payments, distributions from real estate investment trusts (REITs) or income-focused exchange-traded funds (ETFs).
DIY investors can invest directly in high-yielding dividend stocks via the Clarity, by Investec platform.
Some renowned JSE-listed dividend payers include a mix of resource, financial services, banking, and consumer goods stocks, such as:
- Exxaro Resources (EXX-JSE)
- Kumba Iron Ore (KIO-JSE)
- BHP Group (BHG-JSE)
- Nedbank (NED-JSE)
- Absa Group (ABG-JSE)
- Standard Bank (SBK-JSE)
- Old Mutual (OMU-JSE)
- British American Tobacco (BTI-JSE)
- AVI Limited (AVI-JSE)
Investing in an ETF like the Satrix Divi Plus ETF (STXDIV-JSE), which consists of 30 companies expected to pay the best normal dividends over the forthcoming year, is also an effective way to include a diverse mix of South African dividend-paying companies.
Among REITs, Growthpoint (GRT-JSE) and Hyprop (HYP-JSE) are generally considered the more stable, institutional-quality REITs suitable for long-term income portfolios.
DIY investors can also generate cash flow from interest earned on bonds or cash in money markets. A multi-asset income fund is a convenient way to gain exposure to a broader set of assets for income diversification.
Total Return Investing
Total return investing considers the entire growth of your portfolio, including dividends and interest received, alongside capital appreciation.
The focus is on maximising long-term value, regardless of whether returns come from price growth or income distributions.
As such, a total return investor might weight a portfolio towards growth assets, such as tech stocks, global equity ETFs, and offshore index funds.
Examples of growth technology stocks include Nvidia (NVDA-NASQ), Alphabet (GOOG-NASQ), Apple (AAPL-NASQ), Amazon (AMZN-NASQ), Facebook-parent Meta Platforms (META-NASQ), and Microsoft Corp. (MSFT-NASQ).
A popular ETF focused on providing investors with focused exposure to the top growth shares listed on the S&P 500 is the Vanguard S&P 500 Growth Index Fund ETF (VOOG-NASQ).
The Satrix MSCI World ETF (STXWDM-JSE) offers exposure to over 1,500 large and mid-cap companies across 23 developed market countries, primarily in the US, Europe, and Japan, which are regions that typically display higher growth rates than other developed peers.
Choosing the Right Approach
As each strategy delivers different outcomes, there is no one-size-fits-all approach. The right choice depends on multiple factors, including your investment horizon, risk tolerance, and financial needs and goals.
Income investing is typically suitable for retirees, investors who need additional monthly cash flow, or conservative or passive investors who are generally uncomfortable with regularly selling and buying assets.
Total return investing often suits younger investors with longer investment horizons and a higher risk tolerance in the hunt for aggressive wealth accumulation.
Sometimes, it is not an either-or decision. Sometimes the most effective approach is to blend both strategies, as both carry risks.
A portfolio that generates regular dividends but barely grows may lose purchasing power to inflation. Furthermore, dividends are not guaranteed. Companies are sometimes forced to cut dividend payments or stop altogether because profits or cash flows cannot sustain it.
In contrast, A portfolio focused entirely on growth holds a greater risk for losses during market downturns or crashes.
It is also important to recognise the important role that dividends, in particular, reinvested dividends, can play in delivering an attractive total return to investors over time.
