Income Investing and value picking are two different ways to make money from the market. Each has its own advantages, but which is better?
Let us take a quick look at the differences.

When you are investing for an income you are simply finding a list of dividend paying stocks and buying the ones which pay out the most. The main advantage of this strategy is that you are going to get a monthly income from the stock for a relatively small amount of work.

If you can find a stock that is paying you money, why not invest in it and reap the rewards after all. However the major disadvantage to income investing is that it does not guarantee that you will make money, as if anything out there actually does.

Just because a stock is paying out a high dividend does not mean it will be a profitable investment. If it drops to $0 tomorrow it doesn’t really matter how much they were paying you because they don’t exist anymore.

So you are risking getting into a stock that can go to zero.

Value investing on the other hand is a different way of looking at things. This strategy attempts to grow by getting into stocks that will appreciate and takes into consideration many different factors in order to determine the companies overall strength.

One of the main factors which value investors look at is the P/E ratio. So, What is the PE Ratio? This ratio simply tells the individual investor how expensive the stock is when it is compared to its earnings.

So if the stock is trading at $30 and its earnings per share is $3 then its PE ratio is 10. This number can be taken and compared to other companies in the industry in order to pick the best investments out there. Typically the lower the PE ratio the cheaper the stock and the better investment it is.

Of course this is just one example of a method you can use to determine the strength of the overall company. Many investors will actually combine it with other methods in order to increase your chances of getting into a good investment.
Checking out the company’s fundamentals can take a lot of research, but it can be well worth it in the long term.

So, which strategy is better income investing or value investing? Perhaps the real question is why do you have to choose? Combing income investing and value investing lets you get into companies which you believe will be around for a long while with companies that are paying out a health dividend.

You may choose to put more enfaces on one strategy over another, but by combining them you can benefit in two different ways, both by the dividends and hopefully by appreciation.

One other great benefit you get when you combine the two strategies is that you lessen the chance that you are going to get into a company that is not strong and is just going to go bankrupt after you buy it.

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Filed under: Stocks and Bonds

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