Stock market

To earn £1,000 a month in passive income, should I buy growth shares or value shares?

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Both growth shares and value shares offer returns that can equal a reasonable amount of monthly passive income. While growth shares focus on growing the business and consequently the share price, value shares seek to attract investment through dividends.

While growth stocks can be more profitable and volatile, value stocks generally provide a slow but reliable source of income.

So which one is better for passive income?

Well, it depends.

It makes sense to focus on dividend-paying (value) stocks approaching retirement. It ensures that regular payments are made throughout the year to meet financial requirements. But early investors who are financially stable can build a bigger retirement pot from growth shares.

A portfolio of growth shares that grows at an average of 7% per annum would need to invest £171,000 to return £12,000 per annum. Naturally, a portfolio of shares with an average dividend yield of 7% would yield a similar return.

The trick is evaluating growth prospects and consistency of dividend payments to assess the best long-term option.

Estimating part of the development

With a £237bn market cap, Astra Zeneca (LSE: AZN) is one of the most popular pharmaceutical stocks on the market. FTSE 100. The most recent earnings report revealed £47bn in revenue and £39bn in gross profit. It has a dividend yield of just 1.8% but over the past 10 years, its share price has risen from £43 to £123. This equates to an annual return of 11% per annum. If it continues to grow at the same rate, an investment of £10,000 will return £12,000 every year after 23 years.

But while AstraZeneca is doing well, there’s no guarantee it will continue. It faces the threat of patent expiry and strong competition from other major drug manufacturers. Johnson & Johnson, Roche And Merck. One of AstraZeneca’s best-selling drugs, Forexiga, came off patent in 2024. If a competitor releases a similar or better version of the drug, it could cost AstraZeneca $4.3bn in annual sales.

Assessing Value Share

In comparison, HSBC (LSE: HSBA) share price has risen from £6.14 to £6.99 over the past 10 years – an annualized return of just 1.8%. Although it has a high 7% dividend yield, it will take around 30 years to start paying out £12,000 a year. However, the dividend is expected to grow by around 0.2% per year, potentially making the stock a more profitable option over the long term.

But despite the high value of the bank’s shares, there are other risks. When financial crises hit, they often suffer losses. As it is, independent analysts estimate that HSBC’s earnings could decline by an average of 3% per year over the next three years. Lower earnings can put pressure on a bank’s operating profit and negatively impact price performance.

Decision

When trying to build a portfolio for passive income, it’s often best to include a mix of growth and value stocks. This is especially important when looking at a long timeline of 30+ years. Thus, the portfolio can benefit from growth shares during strong economic periods and stabilize with value shares during tough times.

However, as retirement approaches, it may be beneficial to weight the portfolio more toward value shares. This should help ensure a more stable and regular income from dividend payments.


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