Published June 2004
Consider
‘growth and income’ funds for long term
To
work toward achieving your long-term goals, such as a comfortable retirement,
you’ll need to invest in growth stocks. Yet, you may be leery of the investment
risk posed by these vehicles — after all, the stocks with the greatest
potential for growth also carry the greatest potential for price volatility.
So, what can you do? For one thing, you can consider “adding some income”
to your growth.
Specifically, you
may want to invest in income-oriented stocks (traditionally, those that
pay dividends to shareholders). The prices of income-producing stocks
will certainly fluctuate, but generally not as much as the prices of growth
stocks.
One of the best ways
to mix income-oriented stocks in with your growth stocks is through growth-and-income
mutual funds. As the name suggests, the primary objective of these funds
is to grow your principal, with a secondary goal of providing income.
Typically, these funds pay dividends on a quarterly or semiannual basis.
When you invest in
growth-and-income funds, you receive some key benefits:
- Diversification.
As is the case with all mutual funds, growth-and-income funds are made
up of dozens, or even hundreds, of individual securities. Growth-and-income
funds may contain a diversified array of high-quality domestic and foreign
stocks, corporate bonds and government securities. By spreading your
investment dollars over these different vehicles, you can help protect
yourself against market downturns that may affect one asset class particularly
hard.
- Professional
management. When you invest in a growth-and-income fund, you automatically
get the services of an experienced team of investment professionals.
A portfolio manager makes the day-to-day “buy’’ and “sell’’ decisions,
relying on a variety of resources to maximize the performance of the
fund. And financial analysts evaluate the suitability of all stocks
and other investments that go into the fund.
- Liquidity.
You can sell your shares at the current net asset value on any business
day. (However, this value may be more or less than your original purchase
price.)
Reinvesting income
Many people who invest in growth-and-income funds don’t actually need
the money for their cash flow. Instead, they reinvest the dividends back
into the fund.
Should you follow
this dividend reinvestment plan? It depends on your individual needs.
Reinvesting dividends is certainly a great way to build up more shares
in the funds you own. However, at different stages in your life, particularly
in retirement, you may want or need to take the dividends to supplement
your income. In any case, dividends are now more attractive than ever.
The maximum tax rate on dividends is now 15 percent following the passage
of tax law changes in 2003. Previously, dividends were taxed the same
as your individual income tax rate.
Don’t focus on
‘highest income’
When you’re considering growth-and-income funds, you’ll have no shortage
of choices; there are hundreds available. If you are particularly interested
in the “income’’ side of growth-and-income, your first inclination may
be to look for those funds that are the biggest payers. But that may not
be your best move. Keep in mind that the fund’s dividends, like its share
price, will move up and down.
Also, even if you’re
concentrating on income, you still need growth. So as you evaluate specific
funds, pay close attention to their prospects for capital appreciation.
If you’re interested
in growth-and-income funds, consult with your investment professional
to find the ones that offer the asset mix, return and risk level that
meet your individual needs. Make sure to review the prospectus carefully
before investing — the more you know beforehand, the better off you will
be.
Eric Cumley is an
investment representative with Edward Jones Investments at 1201-C SE Everett
Mall Way in Everett. He can be reached at 425-353-2322. Edward Jones is
an NYSE-member investment firm with more than 9,000 locations nationwide.
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