Investors come in all stripes, each with a unique preference for various investing styles. However, they primarily align themselves with one of three strategies: income, growth, or value.
Income investors aim for passive income through dividend payouts and other income-generating assets. Growth investors target companies expected to exceed average growth levels, while value investors hunt for underpriced market opportunities.
Let’s delve deeper into each strategy.
Unveiling Income Investing
Income investing revolves around acquiring passive income. Supporters of this style typically invest in dividend-paying stocks, bonds, real estate investment trusts (REITs), and other assets that provide regular income.
One noteworthy subset is the exclusive club of Dividend Aristocrats, a favorite among income-oriented investors. To join this prestigious group, companies must be part of the S&P 500 and increase dividend payments for at least 25 consecutive years.
Becoming a Dividend Aristocrat isn’t a walk in the park, as it showcases a company’s ability to navigate various economic climates over the years. A prime example of a Dividend Aristocrat is Illinois Tool Works (ITW).
Below, a chart displaying the company’s annual dividend payout is featured.
Image Source: Zacks Investment Research
This style tends to attract more risk-averse investors, with dividend-paying stocks often exhibiting reduced volatility.
The World of Growth Investing
Growth investing is a prevalent strategy where investors chase companies projected to grow their earnings and revenues above the norm, which often translates to superior share performance.
These companies tend to reinvest earnings for business expansion, leading to substantial scaling efficiencies. Many are pioneers of innovation, creating new technologies or disrupting conventional industries with fresh business models.
An exemplary case is NVIDIA (NVDA) in the past year, with Tesla (TSLA) epitomizing the last decade. A chart below illustrates Nvidia’s quarterly revenue.
Image Source: Zacks Investment Research
High-growth companies often trade at lofty valuation multiples due to anticipated rapid growth. It’s crucial to note that this strategy carries more volatility than others, given the evolving long-term outlook.
Growth investing appeals to investors equipped to handle increased volatility and possess a longer investment horizon.
Decoding Value Investing
Value investing entails purchasing stocks at a ‘discount,’ banking on the market ‘catching up’ to their true value, potentially resulting in significant returns. Everyone loves a bargain, after all.
Such stocks typically trade at lower prices compared to peers based on valuation metrics like price-to-earnings (P/E), price-to-book (P/B), and price-to-sales (P/S) ratios.
This strategy demands patience above all, as it may take a considerable time for investors to realize the stock’s intrinsic value. Tenet Healthcare (THC) is an example with a Zacks Rank #1 (Strong Buy) and a ‘A’ Value Style Score.
Currently, THC shares trade at a 14.1X forward 12-month earnings multiple versus the Zacks Medical – Hospital industry average of 15.7X.
Image Source: Zacks Investment Research
The Final Verdict
Many investing styles exist, with income, growth, and value strategies being the most prevalent. Income investors seek stable payouts, growth investors chase above-average-growing companies, and value investors unearth hidden gems in plain sight.
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Illinois Tool Works Inc. (ITW) : Free Stock Analysis Report
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
