Income investing focuses on assets that produce regular cash distributions, such as dividends, interest, or rental payments. Growth investing focuses on assets expected to appreciate in value over time, with less emphasis on current income. Total return, the combination of both, is what ultimately matters. But the way a return is delivered changes how it is taxed, how it feels, and how it interacts with an investor's actual life.
Key takeaway
Income and growth investing differ not in total return potential, but in how returns are delivered, taxed, and experienced by the investor.
This article explains the distinction between income and growth strategies, how Australian tax settings influence the trade-off, and why most investors eventually land somewhere in between.
What income investing means#
Income investing is the practice of selecting assets that prioritise regular cash distributions. The goal is a predictable stream of payments: dividends from shares, interest from bonds or term deposits, or rental income from property.
In Australia, income-oriented share portfolios tend to concentrate in sectors with high dividend payout ratios, particularly the major banks, large resource companies, and listed infrastructure. These companies distribute a meaningful portion of their earnings to shareholders rather than retaining them for reinvestment.
The appeal is straightforward. Cash arrives at regular intervals. It can be used for living expenses, reinvested, or allocated elsewhere. There is something tangible about income: it appears in a bank account, and the investor does not need to sell anything to access it.
Income is taxed as it is received. For Australian tax residents, dividends are included in assessable income for the financial year in which they are paid. Interest income follows the same treatment. The tax rate applied is the investor's marginal rate, subject to any applicable credits or offsets.¹
What growth investing means#
Growth investing prioritises capital appreciation. Rather than selecting assets that pay high distributions, growth-oriented investors seek assets whose value is expected to increase over time. These might be companies that reinvest profits into expansion, technology development, or market share rather than paying dividends.
Growth stocks tend to have lower dividend yields (or none at all) because the company retains earnings. The investor's return comes not from cash received along the way, but from the difference between the purchase price and the eventual sale price.
The tax treatment of growth differs from income in a meaningful way. Unrealised capital gains (paper profits on assets not yet sold) are not taxed. Tax is only triggered when the asset is disposed of through a CGT event.² For assets held longer than 12 months, individual investors in Australia are eligible for a 50% CGT discount, meaning only half the gain is included in assessable income.²
This deferral and discount create a structural tax advantage for patient holders of growth assets, particularly those on higher marginal tax rates.
Total return: why the distinction is less sharp than it appears#
Total return is the sum of income received and capital appreciation. An investment that pays a 4% dividend and grows 3% in value has the same 7% total return as one that pays no dividend but grows 7%.
Over long periods, academic research suggests that income and growth strategies can produce similar total returns, though the composition differs.³ The difference lies in delivery: one provides cash along the way, the other accumulates value silently.
This matters because investors do not experience total return in the abstract. They experience cash in their account, or they experience a number on a screen. The psychological and practical differences between these two experiences are real, even when the arithmetic is equivalent.
| Feature | Income-focused | Growth-focused |
|---|---|---|
| Primary return source | Dividends, interest, rent | Capital appreciation |
| Cash flow | Regular distributions | Minimal until sale |
| Tax timing | Taxed annually as received | Taxed on sale (CGT event) |
| CGT discount eligibility | Generally not applicable to income | 50% discount for individuals (12+ months) |
| Franking credits (Aust. shares) | Often available | Less common (lower payout) |
| Reinvestment | Manual or via DRP | Automatic (retained by company) |
The Australian tax context#
Australia's tax system creates specific dynamics that shape the income-versus-growth decision differently from other countries.
Franking credits and dividend income#
The dividend imputation system means that fully franked dividends carry a tax credit for the company tax already paid on those profits. For investors on lower marginal tax rates, this credit can exceed their tax liability, resulting in a cash refund. For investors on higher marginal rates, the credit reduces but does not eliminate the tax owed.¹
This makes Australian dividend income particularly efficient for certain investors, especially retirees with low or no taxable income, and superannuation funds in pension phase where the tax rate can be zero.
The CGT discount and growth#
For investors on higher marginal tax rates, growth-oriented assets held for more than 12 months benefit from the 50% CGT discount. A capital gain of $20,000 for an individual in the 45% tax bracket (excluding Medicare levy) would be taxed on $10,000 after the discount, producing a tax liability of $4,500. The same $20,000 received as unfranked dividend income would generate $9,000 in tax at the same marginal rate.²
The difference is substantial, and it widens at higher marginal rates.
How marginal tax rate influences the trade-off#
The interaction between tax bracket and return type is one reason the income-versus-growth question has no universal answer.
| Marginal tax rate | Franked dividend efficiency | Growth (CGT discount) efficiency |
|---|---|---|
| 0% (tax-free threshold) | High: full franking credit refund | Low benefit: no tax to discount |
| 19% | High: franking credit exceeds tax owed | Modest benefit |
| 32.5% | Moderate: small gap between credit and tax | Moderate benefit |
| 37% | Moderate: some additional tax after credit | Notable benefit |
| 45% | Lower: meaningful tax after franking credit | High benefit: effective rate roughly 22.5% |
This table illustrates general patterns. Actual outcomes depend on individual circumstances, including other income, deductions, and offsets.
The behavioural dimension#
Tax efficiency is one consideration. Investor psychology is another.
Income investing provides tangible, regular feedback. Dividends arrive quarterly or semi-annually. The investor sees cash entering their account without needing to make any decision. This regularity can be psychologically reassuring, particularly during periods of market volatility when portfolio values decline on paper but dividends continue to be paid.
Growth investing requires comfort with unrealised gains. The portfolio value may increase steadily, but nothing tangible changes until a sale occurs. During market downturns, growth portfolios can decline significantly without any offsetting cash flow. The investor must trust the process without receiving periodic confirmation in the form of deposits.
Neither response is irrational. The investor who sleeps better knowing income is arriving is not making a mistake. The investor who prefers to let capital compound untouched is not making a superior choice. They are expressing different relationships with uncertainty.
The quiet truth is that most investing difficulty is not analytical. It is emotional. The strategy that an investor can maintain through a full market cycle is often more valuable than the one that looks optimal on a spreadsheet.
Accumulation versus decumulation#
The relevance of income versus growth shifts depending on life stage.
During accumulation (building wealth)#
When an investor is contributing regularly and does not need to draw on their portfolio, reinvesting all returns (whether income or growth) maximises the compounding effect. In this phase, receiving dividends and reinvesting them through a DRP produces a similar outcome to holding growth assets that retain earnings internally.⁴
The tax difference, however, remains. Dividends received during accumulation are taxable in the year received, even if reinvested. Growth that remains unrealised is not taxed until sale. For investors in higher tax brackets during their peak earning years, this distinction can affect after-tax compounding over decades.
During decumulation (drawing down)#
When an investor begins living off their portfolio, income becomes more practically relevant. Regular distributions reduce or eliminate the need to sell assets to fund living expenses. This avoids the sequence-of-returns risk that arises when an investor is forced to sell during a downturn to meet cash needs.⁵
For retirees, the combination of franked dividends (potentially generating tax refunds) and the Age Pension income test creates a specific set of considerations that differ from those faced during the accumulation phase.
Why a balance of both is the most common approach#
In practice, most diversified portfolios contain a mix of income-producing and growth-oriented assets. A portfolio of Australian shares, international shares, bonds, and property will naturally produce some dividend income, some interest, and some capital growth.
This blended approach is common for several reasons:
- Diversification. Concentrating exclusively on high-yield income assets often means over-weighting certain sectors (banks, utilities) and under-weighting others (technology, healthcare). A balanced approach spreads exposure.
- Flexibility. Having both income and growth components allows the investor to draw on income when needed without being forced to sell growth assets at unfavourable times.
- Tax efficiency. A mix allows the investor to manage the timing of taxable events to some extent, taking capital gains in years when income is lower, or relying on franked income when marginal rates are favourable.
The IPS (Investment Policy Statement) question of "which outcome matters more to you after tax?" is not asking for a permanent, binary commitment. It is asking about emphasis. The answer informs asset allocation tilt, not an all-or-nothing choice.
The trap of chasing yield#
One risk specific to income investing deserves attention. An unusually high dividend yield can be a signal of distress rather than generosity.
Dividend yield is calculated as the annual dividend per share divided by the current share price. If a company's share price falls sharply (because of poor earnings, debt concerns, or sector headwinds), its yield rises mechanically, even if the dividend is about to be cut.⁶
Investors who screen for the highest yields without examining the underlying business can end up holding companies in financial difficulty. The dividend that attracted them may be reduced or eliminated entirely, and the share price decline that inflated the yield may continue.
A sustainable dividend is one supported by stable earnings, manageable debt, and a reasonable payout ratio. Yield alone reveals none of these qualities. It is a starting point for analysis, not a conclusion.
Closing#
The distinction between income and growth investing is ultimately about how returns arrive, not whether they arrive. Both strategies contribute to total return. Both have roles in a well-considered portfolio. The difference lies in tax treatment, cash flow timing, and the investor's psychological relationship with their money.
Tax position matters: franking credits favour certain brackets, the CGT discount favours others. Life stage matters: accumulation rewards reinvestment, decumulation rewards income. Temperament matters: some investors find reassurance in regular cash, others in a rising balance.
There is no universally correct weighting. The value of understanding the trade-off is not in arriving at a formula, but in being able to articulate why a particular emphasis suits a particular set of circumstances. That clarity is what the IPS question is designed to surface.
Summary#
Income investing prioritises regular cash distributions such as dividends and interest, while growth investing prioritises capital appreciation with returns deferred until sale. Australia's franking credit system makes dividend income particularly tax-efficient for lower-bracket investors, while the 50% CGT discount on assets held for more than 12 months benefits higher-bracket investors who favour growth. Most diversified portfolios blend both approaches, and the appropriate emphasis depends on the interaction between an investor's tax position, life stage, and comfort with how returns are delivered.
Sources#
- Australian Taxation Office. (n.d.). Dividend imputation. https://www.ato.gov.au/businesses-and-organisations/corporate-tax-measures-and-dividend-imputation
- Australian Taxation Office. (n.d.). CGT discount. https://www.ato.gov.au/individuals-and-families/investments-and-assets/capital-gains-tax/cgt-discount
- Dimson, E., Marsh, P., & Staunton, M. (2021). Credit Suisse Global Investment Returns Yearbook 2021. Credit Suisse Research Institute. https://www.credit-suisse.com/about-us/en/reports-research/studies-publications.html
- Vanguard Australia. (2024). The role of dividends in total return. https://www.vanguard.com.au/personal/learn/smart-investing/dividends-role-in-total-return
- Pfau, W. D. (2018). How Much Can I Spend in Retirement? A Guide to Investment-Based Retirement Income Strategies. Retirement Researcher Media. https://retirementresearcher.com
- Australian Securities and Investments Commission. (n.d.). Dividends and imputation. Moneysmart. https://moneysmart.gov.au/how-to-invest/shares