Income-Producing Assets vs. Growth Assets: Why Your Portfolio Needs Both

High-net-worth investors know all investments—both growth assets and income-producing assets—carry an inherent level of risk, but they can also offer exciting opportunities to build wealth in different ways. 

Making strategic investments is important to reach your goals. Each new investment decision requires that you examine your financial plan and determine the level of funds you’re willing to use on the investment. Then you’ll decide how to best dedicate your available funds to potential income-producing assets or growth assets.

What’s the Difference Between Income-Producing Assets and Growth Assets? 

Simply put, an income-producing asset is an investment that can be utilized to ensure a consistent stream of revenue over time. Some income-producing assets, such as certificates of deposit, require a very low-to-medium level of involvement. Other income-producing assets—the kind we’ll be discussing in this article—such as real estate, require more involvement on the part of the investor. 

The time and rate of return will vary depending on the type of investment you make, but some income-producing assets are typically known to be less risky than growth assets—it’s generally expected (although certainly not guaranteed) that you’ll get your capital back. However, because they’re lower-risk investments, the expected returns on such income assets may be lower than on growth assets. 

On the other hand, growth assets are focused on increasing capital. Growth assets generate a return from capital growth and the distribution of profits through dividends. 

While growth assets are attractive to investors because they offer the potential for higher returns, they have above-average risk because they’re subject to volatility. This means that taking a strategic approach to building your growth fund and balancing it with income-producing assets is the key to maximizing your returns. 

Income-Producing Assets vs. Growth Assets

As you consider the best investments to diversify or expand your portfolio, remember that both income-producing and growth assets each have their own advantages and disadvantages. The following lists of potential income-producing and growth assets will give you a better initial grasp of the range of options available to investors. 

Of course, along with conducting your research, it’s just as important to consider a framework for your decision-making. When deciding between different asset classes to invest in—whether income-producing or growth asset—you must be sure to analyze the following characteristics of each investment opportunity:

  • Cost of entry

  • Potential returns

  • Level of involvement

  • Feasibility concerning your financial plan and level of funds 

Potential Income-Producing Assets

As stated above, income-producing assets provide investors with a consistent source of income during the time the asset is held (sometimes after a period of refurbishment, management restructuring, or other improvement projects). Some common income-producing assets include, but aren’t limited to:

  • Real estate

  • Dividend-paying stocks

  • Private equity investing

  • Peer-to-peer lending

  • Farmland

Real Estate 

Income-producing real estate investments involve purchasing property and renting to tenants to earn income over time. Investing in real estate has the potential to expand your capital rapidly while generating income during the time the asset is held. 

There are many types of real estate investments that can be made, including residential real estate, commercial real estate, and industrial real estate, all of which offer a myriad of opportunities and risk profiles. 

Dividend-Paying Stocks 

Investments can be made in business equity which allows for income generation through dividends. Large-cap dividend investing is known for its consistent increases in dividend payouts. Large, well-established companies that are more able to accurately predict their profits, such as Walmart Inc. (WMT), are most known for paying dividends. 

Private Equity Investing 

Private equity investing involves investing in private companies outside the public market, many of which are startups or corporate acquisitions. Private equity investments are typically only available to accredited investors and institutional investment firms. Be aware of the timeframe limitations in accessing your investment, as these vary depending on the company.

Peer-to-Peer Lending

Rather than using a large-scale financial institution to obtain a loan, peer-to-peer lending allows borrowers to receive a loan (sometimes at a lower rate) directly from the investor. Investors enjoy the benefit of loaning money to a vetted borrower and earning interest payments as the borrower pays back the principal on the loan.

Farmland

The demand for farmland is high. Mostly because it has little correlation with the stock market, investors may experience less volatility on farmland investments compared to other income-producing assets. 

Common strategies involve purchasing land to lease to a farming company, investing in a farmland-specific real estate investment trust (REIT), or investing in farmland shares through a farmland investment platform like AcreTrader. 

Potential Growth Assets

In comparison to income-producing assets, growth assets focus more heavily on capital growth and less on consistent streams of income. Common growth assets include, but aren’t limited to:

  • Growth stocks

  • Growth funds

  • Bonds

  • Real estate investment trusts (REITs)

Growth Stocks 

Growth stocks typically do not pay dividends. The invested capital and company earnings are retained by the company to reinvest in further growth. Investors earn money on growth assets through capital gains when selling stocks in the future.

Growth Funds

Growth funds are similar to growth stocks, but are instead consist of a diverse portfolio of stocks from several companies with capital appreciation as the primary goal. These portfolios consist of above-average growth companies that reinvest their earnings into expansion, acquisitions, or research and development. Most growth funds are considered high-risk, high-reward investments.

Bonds

Similar to IOUs, bonds are debt security. When you invest in a bond, you’ll be lending money to the issuer, which may be a government, municipality, or corporation. In return, the issuer promises to pay you a specified rate of interest during the life of the bond and to repay the principal when it comes due after a set timeframe. 

Real Estate Investment Trusts (REITs)

REITs are companies that manage or finance commercial real estate that produces income. REITs own properties themselves or the mortgages on those properties. You can invest in the companies individually or through an ETF or mutual fund consisting of REITs. 

Why Your Portfolio Needs Both Income-Producing and Growth Assets

Stress around investing in income-producing and growth assets is real. Luckily, the most important thing to remember is easy: create a diverse portfolio. Savvy investors make investments across platforms, and your portfolio can generate wealth for your future in a variety of ways. 

And who doesn’t want a layer of protection if one of their investments isn’t profitable? Investment diversity can also help you stagger your income and grow reliable revenue across multiple sources, especially as traditional routes of saving a large enough nest egg for a comfortable retirement become more and more difficult for even high-net-worth investors.

At Chicago Trust Administration Services, we help investors who want to take control of their future to invest in alternative assets using retirement funds in a self-directed IRA. We provide fast, IRS-compliant service to help you make your transactions quickly and easily. To see how we can help, we invite you to schedule a complimentary meeting with us by calling 312-869-9394 or emailing steve@ctasira.com.

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*The content and opinions in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

**CTAS professionals are not financial advisors and cannot provide advice or recommendations regarding specific investment decisions.

Steven Miszkowicz