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Income stocks or growth stocks? Cash now or cash later? A bird in the hand or two in the bush? This is the essence of a burning question that anyone looking to maximise their passive income through the stock market must answer.
On the one hand, we have income stocks that use earnings for ‘cash in your pocket’ dividends. These are paid out once, twice, or sometimes four times each year. On the other, we have growth stocks where an investor expects a growing share price so that the shares can be sold to make their money.
In this article, and with the help of a favourite income stock of mine, Legal & General (LSE: LGEN), I’ll outline three situations where I think income stocks win the battle.
Reason: psychological benefit
Seeing cash enter your account is a psychological benefit for many. The money is there and there’s no escaping it. Some investors will thrive seeing a tangible return on their investments. This can lead to more savings and better investment decisions in general.
Those who opt for growth instead may go decades without a capital gain. This effect can be particularly pronounced during down periods such as between 2000 and 2015, when the FTSE 100 didn’t surpass its high for 15 years.
If another long run of underperformance is on the horizon, then I’ll be thankful for the rising dividend of Legal & General, expected to be a 8.6% yield over the next 12 months. The income received will feel like progress even if the stock market as a whole is having a wobble. Of course, dividends are never guaranteed and tend to be lower or even cancelled when times really get tough.
Reason: fewer ups and downs
Dividend stocks tend to be older businesses, in more mature and more saturated markets. And importantly, with more predictable income streams. Combine steady earnings with a regular payout from the dividend? You’ve got a stock that rises and falls more gently over time.
For anyone who just about has a heart attack when seeing one of their stocks nosedive (goodness knows I’ve had a few), then a lack of erratic zigzagging might be good for the soul.
The share price chart of Legal & General shows a steady 10 years or so. Even the larger shocks like the 2020 crash from that pesky little coronavirus did not affect the FTSE 100 insurer as much as others.
Reason: defensive
Dividend stocks tend to be more defensive, which means they perform better in hard economic conditions. The passive income from dividends is a part of this resilience. But the nature of dividend stocks tends to be in sectors like banks, energy, or alcohol.
Such products and services are needed (or wanted!) in all types of economic conditions, good or bad. With a catalogue of insurance, investment, and retirement products and services, Legal & General is in a good place to weather economic storms. No one knows yet whether the times ahead are rainclouds or sunny skies. But defensive dividend-payers like Britain’s largest insurer by assets are ones to consider in the event of overcast conditions.
