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Growth traders and investors are primarily focused on stocks with aggressive earnings growth or revenue growth (or at least the potential for aggressive growth), which should propel their stock price higher in the future.
You'll often find smaller-cap stocks in this category because these are typically newer companies that are in the early part of their growth cycle. But you'll also find mid-caps and large-caps in the category as well.
Growth stocks can carry a higher degree of volatility. But they are also known for producing spectacular returns.
Value investors and traders favor good stocks at great prices. This does not mean they have to be cheap in price however.
The key is the belief that they are undervalued. That they are, for some reason, trading under what their true value or potential really is. And the value investor hopes to get in before the market 'discovers' this and moves higher.
A value investor will typically have a longer time horizon of 6-12 months or more. Value stocks are also typically associated with being less volatile.
Momentum traders and investors look to take advantage of upward trends or downward trends in a stock's price or earnings.
We've all heard the old adage, "the trend is your friend." And who doesn't like riding a trend? Momentum traders believe that these stocks will continue to head in the same direction because of the momentum that is already behind them. In fact, studies have shown that stocks making new highs have a tendency of making even higher highs.
Momentum stocks, like growth stocks, can also carry a higher degree of volatility. Although the momentum trader expects the gains made because of this, to make it all worthwhile.
Income investors are generally looking for companies with stable earnings growth that pay a solid dividend.
Oftentimes, these companies are more mature, larger-cap companies that no longer have the kinds of spectacular growth rates like some of the younger or smaller companies, or like they themselves had when they were younger and earlier in their growth cycle. Many of these companies are generating huge amounts of cash, but because of their size, may not have the growth opportunities they once had.
Income investing is typically considered to be a more conservative style of trade, if done right. And the income investor will typically look to hold onto his or her stocks for a longer period of time.
One of the keys to successful trading is to get into stocks that are in alignment with who you are as a trader. Gladly most people fit into one of the four main investing styles: Growth, Value, Momentum and Income. This page is dedicated to the income style. Watch the short video below and read education material underneath to learn the habits of successfully trading with income stocks.
Growth and Income: Best of Both Worlds
Investors looking for income producing (dividends) stocks are well served by looking for both growth and income, i.e., companies with stable earnings growth that pay a solid dividend.
"The best income producing stocks are those with stable earnings growth that pay a solid dividend."
Oftentimes, these companies are more mature, larger-cap companies that no longer have the kinds of spectacular growth rates like some of the younger or smaller companies, or like they themselves had when they were younger and earlier in their growth cycle.
Many of these companies are generating huge amounts of cash, but because of their size, may not have the growth opportunities they once had.
The Law of Big Numbers
Consider this; an idea that generates $1 billion in profits for a $1 billion company represents a 100% growth rate. But that same $1 billion idea applied to a $10 billion company only represents a 10% growth rate.
In other words, it's much harder to move the needle on earnings the bigger the company gets. So, many of these companies will pay out a portion of their earnings to shareholders in the form of dividends.
The Income investor will want to look at a number of fundamental factors like the company's balance sheet, its competitive advantage, and its management but the most tangible proof that a company is worth holding for the long-term is earnings. You don't necessarily expect to see explosive growth, but you should look for steady and consistent growth over time. And a company that generates solid earnings growth is in a better position to raise its dividend over time as well.
When To Hold and When to Fold
Earnings estimate revisions are the cornerstone of the Zacks Rank. Whenever you find positive earnings revisions, you will generally find a company moving in the right direction, making it a perfect candidate for long-term ownership.
There may be fewer dividend paying stocks in the Zacks Rank #1 group, but there will be plenty of #2's, and you might even consider some #3's for the larger-cap companies.
And be sure to look for those with a favorable Growth Score as those are the ones that should significantly outperform the other income producing stocks. Those with a strong Value Score will also do well as research shows a correlation between dividends and value.
As you know, you'll typically have a longer holding period with a dividend paying stock. But a decline to a Zacks Rank #4 or #5 and a falling Style Score can be an early warning that business conditions are worsening and therefore that it is time to take profits and get out.
"I find the service Zacks provides in selecting and ranking stocks to be very helpful. They do the 'heavy due-diligence' investigation before ranking each stock...that relieves me of a lot of the necessary work that needs to be done prior to a stock purchase."
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"I find the service Zacks provides in selecting and ranking stocks to be very helpful. They do the 'heavy due-diligence' investigation before ranking each stock...that relieves me of a lot of the necessary work that needs to be done prior to a stock purchase."
- Tracy E. of Haverhill, MA