Income vs. growth: tailoring a portfolio to meet your goals

At a glance

• Investing for growth solely focuses on increasing portfolio value over time, while investing for income prioritises generating regular payments for an investor
• Investing for income sees dividends and bond coupons paid out to you, rather than typically being re-invested back into the market as is done for a growth strategy
• A portfolio invested for income could help unlock lifestyle flexibility by providing a consistent, supplementary income
• Investors don't have to choose one or the other: you could have some investments focused on growth, and others working hard to generate income.

Growing your investment portfolio to reach different financial milestones throughout life is central to many sound financial plans. But investing doesn't just have to be focused on growth. Your investment portfolio can also be a powerful tool to produce a consistent stream of income. This could help to support you at different stages in life for a wide range of personal circumstances. Financial goals and priorities can change, and it is important that the way your portfolio is invested is aligned with what you are trying to achieve.

In this article, we look at how investing for income differs to investing for growth, and when income might be a priority for an investor.

Investing for growth

For many, investing for growth is about reaching a long-term financial goal. It could be part of a five or thirty-year plan, or anywhere in between. Whether it is a house deposit, or building your retirement nest egg, growth is key.

There are two sources of portfolio growth:

1. Making additional contributions to your portfolio, which are then invested
2. Your investments providing a positive total return (through capital growth and any dividends or interest being re-invested), helping you to benefit from compounding.

The role of equities

Equities, or stocks, are a key asset class when it comes to finding growth. They are typically riskier and more volatile than bonds, and as such, investors demand greater potential for returns in exchange for their money. This is known as the 'equity risk premium'. If an asset class is riskier, there needs to be the possibility of it providing a greater pay-off for it to look attractive.

Chart 1: £100 invested in global equities 30 years ago would have grown to over £660 today

Source: Macrobond, Nutmeg. Values not adjusted for inflation or any fees or charges payable. Index shown is the MSCI All Cap World Index, with a starting value of 100. Date range: 01/01/1995 - 15/05/2025. Past performance is not a reliable indicator of future performance.

Equities have demonstrated, historically, that they are a high-growth asset class, as the chart shows. They have also experienced periods of elevated volatility where prices have fallen sharply, but the overall long-term trajectory has been positive. The global equity index used in the chart comprises stocks of an incredibly wide range of companies, some of which are primarily focused on growth, and other more mature companies that may be less so. This shows that even at a very broad level, without any consideration for the highest-growth sectors or markets, equities have seen substantial growth.

There are many factors to consider when assessing which areas of the equity market may be best suited as a source of growth. Dynamics differ from country to country and index to index. Markets that may provide high-growth opportunities can also have heightened volatility. Therefore, you need to understand your tolerance to risk of loss in order to balance it with potential reward.

We believe having a diversified approach to building any portfolio is key, whether your focus is on growth or income.

Potential sources of equity growth include:

• Dynamic markets that have a broad array of investment opportunities and strong entrepreneurialism. For example, some regions' stock markets see more new businesses going public by listing on a stock market than others, which could potentially be sources of future growth.
• Younger, smaller companies (small caps) with greater potential scope to grow than older, more established companies.
• Sectors poised for growth. For example, in recent years US technology companies have grown to be among the largest businesses in the world. Investors who identified this early on are likely to have benefitted from substantial returns. 
• Emerging markets, where there is potential for high growth rates. China, for example, has evolved over multiple decades to become one of the two largest global economies alongside the US.

There are a variety of ways to gain exposure to these types of assets, such as:

• Exchange-traded funds – ETFs – which are a basket of securities, can provide broad exposure to growth-focused assets, or more specific exposure to a certain sector an investor has identified as a potential growth opportunity. We believe that ETFs are a highly effective way to access financial markets. They are low-cost, efficient, transparent, and diversified investment vehicles.
• Mutual funds, where an investment manager selects the underlying assets on behalf of investors
• Picking individual stocks to invest in yourself. It is, again, important to note that investing in high growth equities does carry risk, and so many investors may choose to balance this risk by having a well diversified portfolio that also includes other asset classes, sectors and geographies.

How investing for income differs

The top investment objective when investing for income is for the portfolio to receive a consistent stream of payments from its investments, which can then form a regular income payment to the investor.

While a growth-focused strategy is usually heavily invested in equities, prioritising income will change the mixture of assets an investor requires. Equities can still play a significant part in this, but the types of companies held will differ. There are many companies that focus on paying investors a reliable dividend, rather than being focused on growth as their main goal.

Investing for income would typically require:

1. equities with higher dividend yield (with the caveat that it might often create less balanced portfolios), and/or
2. a higher fixed income allocation, and/or
3. a more innovative strategy often involving equities, to generate an attractive level of income in a balanced manner. 

Bonds, also referred to as 'fixed income' investments, are typically central to an income strategy. Bonds represent a loan made by an investor to a borrower, with the borrower then providing the investor with a regular payment in exchange for their capital, which is then repaid at the end of a pre-agreed period of time, or 'term'. Borrowers, also known as issuers, are typically companies and governments around the world. Bonds usually pay a return to investors in the form of coupons, until such time as the bond 'matures' and the sum initially borrowed from the investors is returned.

While the income from bonds and dividend-paying equity investments can provide the backbone of a multi-asset, income-focused portfolio, there are other innovative methods to generate income. For example, there are investment strategies that use financial tools such as derivatives, which can be designed to enhance the level of income generated. To learn more about the different sources of investment income, you can read our piece on 'How do investment portfolios earn an income for investors?'.

When investing for income might become a priority

There are many situations where receiving additional income from your portfolio may become your top priority. Some investors start out with growth goals and transition to income goals over time. Others have different circumstances which mean they want more income flexibility sooner in life.

A common path from growth to income

When investing for later life, a typical model would be to firstly focus on investment growth, then, when closer to retirement age, some may prefer lower volatility investments to help reduce risk and stabilise portfolio value. This will depend on the investor's tolerance and capacity for risk. Typically, the focus would then progress to how a portfolio can produce income to fund the desired retirement lifestyle.

In this investment journey, the objective for the portfolio is clear: 1) prioritise growth early on with the objective of increasing the portfolio value, 2) focus investments more on income further down the line, if and when it is required.

As well as part of a retirement plan, there are many scenarios where an investor will find themselves looking to generate an income from their portfolio.

Investing for income could unlock lifestyle flexibility at any stage in life

• Seeking greater flexibility

Perhaps you're looking to work less and are exploring how you can supplement a reduction in earnings using your investments. Or you might be in a position where you would like to help fund your children through university, increasing your monthly outgoings. You could consider having some of your portfolio focused on income investments, and some still focused on long-term growth to target other financial goals further down the line.

• Supplementing a variable monthly income 

You may be self-employed and have a variable monthly income that makes planning your finances more challenging. Investing for income could help make your pay more consistent, with our 'income smoothing' feature aiming to provide a similar payout each month.

• Investing a lump sum

You may have received a lump sum through inheritance, via the sale of a business, or from a property sale. Having this invested in a strategy focused on paying an income could complement other sources of income you may have or offer increased flexibility.

• Already or soon-to-be-retired

You might be approaching retirement and are looking to have some of your investments focused on long-term growth and others providing an income to cover some of your expenses. You could be planning to withdraw a tax-free lump sum from your pension, if and when you are eligible and want to put it to work to produce an income. Income from your investments could complement other streams of income you expect to receive in retirement.

Ensure your portfolio serves you

Whether you are focused on hitting a long-term goal that requires as much investment growth as possible, or receiving an income from your investments is top priority, how your portfolio is invested should serve your needs. It isn't a case of one strategy being better than the other, it's about your long-term financial goals and making sure your portfolio is invested in the best way for you.

Investing for income may not be something you have considered, but it could be a powerful way to unlock greater lifestyle flexibility, whether your need for additional income spans several years or even decades. 

To discuss if Nutmeg's new 'Income Investing' investment style could be right for your portfolio, you can book a free call with our wealth experts. We can talk you through how it works, chat about your current investment strategy and answer any questions you have. Just choose a time that works for you.

Risk warning

As with all investing, your capital is at risk. The value of your portfolio with Nutmeg, and any income from it, can go down as well as up and you may get back less than you invest. Income isn’t guaranteed. £10,000 minimum investment required for a Nutmeg Income Investing portfolio.

Past performance and forecasts are not a reliable indicator of future performance. We do not provide investment advice in this article. Always do your own research.