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Growth stocks are those companies that reinvest profits to expand rapidly rather than pay high dividends. They tend to offer strong earnings growth, high return on equity (ROE) and are often overvalued, with price‐to‐earnings (P/E) ratios above 30.
The appeal is potential large capital gains over time. The risk is that growth projections can fail and high valuations make investor expectations fragile.
Income (dividend) stocks on the other hand provide more predictable cash returns. They pay dividends regularly. Pros include reliable income streams and sometimes lower volatility.
Cons include weaker growth, dividend cuts in downturns, and sometimes lower total return if growth lags.
The key is diversification. It’s wise to spread exposure across growth and income stocks and across different sectors. That mix can smooth returns, reduce risk if one sector falters and provide both income and growth potential.
Here’s an example portfolio of FTSE 100 shares split evenly between income and growth:
| Stock | Type | Sector |
|---|---|---|
| HSBC | Income | Banking |
| British American Tobacco | Income | Consumer non‐durables |
| Phoenix Group | Income | Insurance |
| Land Securities Group | Income | Property |
| Rio Tinto | Income | Mining |
| Rolls-Royce | Growth | Aerospace |
| RELX | Growth | Commercial services |
| Next | Growth | Consumer non‐durables |
| Sage Group (LSE: SGE) | Growth | Technology |
| 3i Group | Growth | Investments |
This example shows how different sectors contribute – banking, tobacco, mining for income; software, aerospace, investment trusts for growth.
Metrics to look for
Income stocks typically have:
- Dividend yields above 5%
- Several years of consistent dividend payments
- Healthy balance sheet, low debt, dividends covered by earnings and cash
- P/E ratio below 15
Growth stocks typically have:
- High ROE
- Strong earnings growth
- High valuation (P/E often above 30)
A growth stock example
Sage Group is a strong candidate growth stock for investors to consider among UK tech names. It has recent revenue around £2.42bn, up about 7.7 % year on year. Its ROE is approximately 36.78 % and its P/E ratio is in the low 30s – around 31.2 trailing.
Sage’s growth is driven by a shift to cloud and subscription-based services. The company is investing in generative AI tools in an effort to boost product performance and compete more effectively on the international stage.
But while a high valuation is typical of growth stocks, it also presents risk. If growth slows or costs rise, disappointing profit calls may disappoint investors. Another risk is competition: many firms globally offer cloud software for small‐to‐medium business functions like accounting, payroll and HR.
Additionally, macroeconomic pressures like inflation or weak demand in certain regions could reduce growth. But if Sage can innovate rapidly enough, it should maintain market share and continue to enjoy notable growth.
Weighing up the mix
Combining growth stocks like Sage with income stocks can help an investor balance risk and reward. Income stocks can dampen volatility and offer cash flows even when growth lags. Growth stocks can drive portfolio returns when they perform well.
Investors should think about their risk tolerance, investment horizon and need for income vs growth. When picking stocks, always check financial health, growth metrics and valuation to help build a more resilient portfolio.
A well‐diversified portfolio that includes both income and growth stocks across sectors can help smooth returns while capturing opportunity.
