Hey Dave Ramsey, What is 'Growth & Income'?
Definition and Examples of Growth and Income Mutual Funds
When the personal finance guru Dave Ramsey recommends growth and income funds, some investors, especially new ones, may wonder what he means. Dave refers to his investment advisers for detailed information, but this article provides all the information you need to know about growth and income funds.
Defining Growth and Income Funds
The growth and income investing strategy is simply an investing objective that consists of investing in both growth and income securities. This is still a deceivingly broad definition because growth is a broad stock investment objective, and income can refer to either stocks or bonds, or both. One could even say that a diversified portfolio of mutual funds, consisting of various stock and bond funds, has a growth and income objective.
Growth stocks are securities of companies that have potential to grow their earnings faster than the average company. These are typically newer companies that have yet to come into full form but are very much so headed in the right direction. Because they are younger companies, they will generally not pay dividends to shareholders because they need to reinvest profits back into the company to keep fueling growth. The incentive for investors is the growth in stock price.
Income stocks are those that pay above-average dividends. Blue-chip companies—which are older, well-established companies with a history of paying out consistent dividends—are safe choices for those seeking income stocks because of their reliability. These are companies that have been around for generations, such as Coca-Cola and The Walt Disney Company. Bonds, which are included in the broader fixed income category, are inherently income securities because they pay interest to the investor.
A Word of Caution
I like Dave Ramsey, and I am happy to tell anyone that he is one of the reasons I began investing in mutual funds. Dave is also good at keeping things extremely simple, which is for a good reason. I don't think that Dave Ramsey wants to fool anyone, but giving out over-simplified, general guidance is far from the specific advice most investors need.
Many growth and income funds conveniently include the terms "growth" and "income" in their formal fund name, but this convenient moniker can be misleading. For example, one of the best-performing growth and income funds in recent years is Calamos Growth & Income (CGIIX). This fund does not consist of stocks, but rather convertible bonds; there is a large difference. A popular example of a growth and income fund is Vanguard Growth & Income (VQNPX), which only invests in stocks. While this may deserve the growth and income description in the world of equity investing, there are no bonds in the fund, and many income investors like to use bonds in their portfolios for diversification purposes.
The Bottom Line
It's potentially a mistake to invest in growth and income funds as a mutual fund type, but you may learn how to build a portfolio of mutual funds and create an investment objective that suits your needs best. There's nothing inherently wrong with growth and income funds, but there is something wrong with telling large audiences that one particular fund type is suitable for anyone to buy and hold.
Furthermore, some funds can be considered growth and income that are not always categorized as such. For example, S&P 500 Index funds will naturally hold a combination of growth and income stocks. If an investor already holds a fund like this—and millions do—they don't need another growth and income fund.
This is general information that may or may not be applicable on an individual basis, so it is important that investors find funds that suit their personal goals and tolerance for risk. Do your own homework, rather than read or listen to one perspective.
SEC. "Stock Funds." Accessed March 30, 2020.
Vanguard. "Vanguard Growth and Income Fund Investor Shares (VQNPX)." Accessed March 30, 2020.
Calamos Investments. "Calamos Growth and Income (CGIIX)." Accessed March 30, 2020.