Income vs. Value vs. Growth Stocks, which is better?


As a stock market investor on Wall Street, you always aim to get the highest possible capital gains. But doing so requires a deep understanding of each of the stocks you own. One commonly used framework is to classify them into income stocks, value stocks, and growth stocks. You might have already heard others referring to stocks that way. But what does this actually mean? And more importantly, which one is better, Income vs. Value vs. Growth Stocks?

If you want to know which one is better for you, you first need to understand their differences. In this post, we are deep-diving into these three classifications. After reading this post, you will be able to classify a stock correctly and know what type of stock you like the most.


What are Income, Value, and Growth Stocks?

If you want to know in which category your stock belongs, you need to have a basic understanding of each of them. Let’s examine the similarities and differences between Income, Value, and Growth Stocks.

Income Stocks Value Stocks Growth Stocks
Risk Level Low Medium High
Valuation Fair Undervalued Often Overvalued
Size Mid-Cap, Large-Cap Mid-Cap, Large-Cap Small-Cap, Mid-Cap, Large-Cap
Dividend Yes Sometimes Rarely
Profitability Yes Mostly Rarely

Income, Value, and Growth Stocks

Income Stocks

Income stocks are also commonly referred to as Dividend Stocks. They got their name because they produce a regular income in the form of a monthly, quarterly, or annual dividend. Dividend-paying stocks and companies are usually well-established and farther down the road in their company history. They are not growing at a stellar annual rate anymore. The size of the dividend differs from company to company. You call this the dividend yield. It’s a measurement that compares the company’s stock price to the dividend it pays.


What makes them so popular is their predictability and stability. If a company has paid a dividend for a long time, it’s uncommon to abruptly stop doing so. That’s not to say that this will not happen. We’ve seen many companies suspend their dividend during the COVID pandemic. But most of them have reinstated their dividend since.

If a company has raised its dividend consistently for at least 25 years, it belongs to a list called Dividend Aristocrat. There are even exchange-traded funds and mutual funds available if you like these types of companies.

Income stocks have a lower risk compared to Value and Growth Stocks. By reinvesting your dividend, you can grow a dividend portfolio and let your returns compound. Once ready, you enjoy a regular income in the form of dividends without having to sell any shares.


Examples of Income Stocks

  1. PepsiCo, Inc (PEP) – Dividend Yield: 2.8%, raised dividend for 51 years
  2. Sysco Corporation (SYY) – Dividend Yield: 2.91%, raised dividend for 54 years
  3. Johnson & Johnson (JNJ) – Dividend Yield: 2.97%, raised dividend for 61 years

Value Stocks

You call a stock a Value Stock if it is presently undervalued. If you see a higher value in the company than the market currently attributes, it opens an investment opportunity that can outperform the market over the long term. Of course, determining that a company is undervalued requires some homework. Value investing requires you to dive into the company’s financials to make such a determination. Many metrics and ratios, such as book value, price-to-earnings multiple, etc., are important to look at.

Value Stocks are usually associated with a low Price-to-Earnings Ratio, low Price-to-Book Ratio, low Price-to-Cashflow ratio, and a high dividend yield. But this is not a strict rule. What classifies a ratio as low is different for each industry. Specifically, the P/E ratio can easily mislead you. Low P/E ratios can also mean that the business is in decline. The last thing you want is to invest in a declining business!

Your company can also become a Value Stock if the public perception changes. Maybe there is some positive news that will change the company dynamics and make your company much more attractive. But it’s not just positive news that can change the needle. If, for instance, the leadership team gets caught up in a scandal that has little to do with the actual business, the stock price can take a dive. These events can provide an attractive opportunity to invest if you believe the company will recover eventually.

Determining a Value Stock is somewhat subjective to your research and views. Value investors don’t use a well-defined or standardized framework. Different investors might disagree with your determination.

If you look at the risk profile of Value Stocks, they are generally less risky than Growth Stocks. Since companies in the Value Stock category are well established, they are usually in their profitable phase of business. This allows you to come to your conclusion with less speculation. You have much more company history to point to when predicting future returns.

Growth Stocks

Growth Companies are mostly in the unprofitable business phase. They put growth over profitability in terms of business priorities. What drives their price is future growth, opportunity, and market share. A company can remain in the growth phase for many years. Take Apple for an example. You could say that Apple is still in the growth phase despite its size. Of course, Apple is a profitable company. This just shows that there are exceptions to the rule. Some companies earn a lot of money in their growth phase and always try to reinvest just enough to end each quarter with +/-$0. This is an ideal scenario as the company is in the growth stage without producing much debt.

Growth companies can often be found in the technology or Biotech industry. These companies can also be in a Hyper-Growth Stage. In this early stage, their revenue can increase triple digits year-over-year. At best, such a growth rate will only be sustainable for a few years. But it provides an outsized opportunity for growth investors to get an even bigger piece.

As a Growth Investor, you always look for the next Apple or Amazon. You invest in companies in their early stages. This strategy can produce many losers over time but does not need many winners to make your losers irrelevant. If your risk tolerance is high enough to stay the course for many years, your investments might pay out handsomely.

You might have heard about the interest rate hikes from 2022/2023 (who has not…). What’s important to understand is the dynamic this interest rate creates for Growth Stocks. Money is now much harder to get. You will have to pay up if you need financial aid, such as a business loan. This market condition has hit Growth Companies the hardest since they are most of the time non-profitable. We already know that the interest rate will most likely stay elevated for the foreseeable future. That’s why I believe Growth Stocks will have a few hard years ahead.

Examples of Growth Stocks

  • Crowdstrike Holdings Inc (CRWD)
  • MongoDB, Inc (MDB)
  • Okta, Inc. (OKTA)

Can Stocks belong to more than one Category?

Yes, stock in your investment portfolio can belong to more than one category simultaneously. These classifications exist to solidify your investment strategy, so they are more to be understood as a framework. Recent events for any company can provide an attractive share price point to scoop up some shares. In other words, any growth company or dividend-paying company might currently be undervalued.

On the other hand, it is very rare to be a Growth Stock and also an Income Stock simultaneously. Since companies in the growth stage usually are non-profitable, or sometimes even pre-revenue, they don’t have enough money at hand to pay out a dividend. There are better ways to put the company’s capital to work, such as research and development (R&D).

Are there other ways to invest in these Categories?

You don’t have to pick individual companies or individual stocks to take advantage of investing in these categories. ETFs are a widely adopted way to invest in all kinds of sectors, industries, styles, geographies, and more. Income funds, value funds, and growth funds are no exception to that.

An example of a Growth Stock ETF is the Vanguard Russell 1000 Growth ETF. With an expense ratio of just 0.08%, you can invest in a well-diversified portfolio of growth stocks without having to do any research about individual companies.

Which of the categories has outperformed?

If your answer to this question had been Growth Stocks, it would not surprise me. In the last 10 years, growth investors have enjoyed outsized returns compared to other stock investors. You can see that in the chart below. In fact, the Growth Stock ETF is the only one from this list that outperformed the S&P 500 over that time.

2013-2023: SPYV (Value Stock ETF, blue) vs. NOBL (Div. Aristocrat ETF, red) vs. SPYG (Growth Stock ETF, green)

A common tip I often give to investors is: When in doubt, zoom out!

If we look at the same chart from 2001 to 2023, it paints a different picture compared to the short term. Of all the ETFs, the Growth Stock ETF has had the lowest returns:

2001-2023: SPYV (Value Stock ETF, blue) vs. NOBL (Div. Aristocrat ETF, red) vs. SPYG (Growth Stock ETF, green)

Since the recent interest rate hikes will make it much harder to get fresh capital across the board, I believe that we will see an outperformance of Income and Value Stocks compared to Growth Stocks. At least for the next few years, I expect this to be the case. People are already much more interested in dividend and value stocks. All it needs is time. Remember that past performance is never a good indicator of future returns.

How do you find good Income, Value, or Growth Stocks?

There is no one-fits-all solution to finding good companies in those categories. Some websites have lists of the best Stocks in all those categories. Another option is to use stock screeners. However, a Stock Screener requires a good understanding of metrics, ratios, and financials to be useful. Most feature-rich stock screeners also cost money to use.
There are some free options available, but some of them only allow limited functionality for free:

Whenever you have a company you think is worth your money, you can use my framework to evaluate it deeper. The more research you can do, the more you can increase the odds of a higher return.

Final Thoughts – Income vs. Value vs. Growth Stocks, which is better?

There is no final answer to “Income vs. Value vs. Growth Stocks, which is better?”. These classifications provide guidance for you to make better investment decisions. Only time will tell when and by how much any one of the categories will outperform the others. What is best for you depends on your investment objectives. Do you want to create a passive income stream, or do you want to find the next Apple? These are all legitimate objectives to have.

Your portfolio does not have to strictly be only Income Stocks, Value Stocks, or Growth Stocks. Keep your portfolio diversified and concentrate on long-term investment.

You have learned what makes a stock belong to Income, Value, and Growth Stocks. Each category has different risk profiles and strategies. Use that knowledge to find your next investment idea.

Disclaimer: None of the mentioned stocks/ETFs/Mutual Funds are to be understood as recommendations. Don’t buy yourself something solely based on what you read here. Consult with a financial advisor to discuss your personal financial situation. This post is provided for educational purposes only.

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