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I'm doing some research as I prepare myself to start my long-term(25-30 years) investment journey. I'm taking notes covering basic terms, fund info (holdings, volatility etc) and preparing my investment portfolio. The linked investopedia page (see below) mentions that it's a good strategy to combine Value and Growth ETFs.

This article on investopedia covers the Value ETF vs Growth ETF comparison. I'm able to understand that Value ETFs are providing dividends which means periodic returns. So far so good.

In the case of Growth ETFs though, you can only make money from it if the price grows and you sell at a higher price than you acquired. Is that a correct statement? Is there any other way to generate income from Growth ETF funds?

The part of the link that I'm specifically referring to is this:

If you're seeking a regular income from a growth ETF, you're more likely to be disappointed. Many growth-oriented companies reinvest available cash back into growing the business instead of paying profits out to shareholders directly. Many of these companies pay little, if anything, in regular dividends.

So if there are no dividends for a given Growth ETF fund how else can income be generated?

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  • A dividend provides yield not income. Suppose you have 2 ETFs that cost you $100 each. "A" pays a 5% annual dividend and at the end of one year it's $85. "B" pays no dividend and at the end of one year it is $90. Which was the better investment? Hint: Consider taxes if non sheltered. Mar 10 '20 at 22:10
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If you're 25 years from retirement, you don't want income from your investments**, you want the value of your investments to grow. When you're getting ready to retire, you'll want to convert some or all of those growth investments into investments that do generate income, because you won't have income from your job any more.

** It's OK if they do pay dividends. Re-investing dividends is another way to achieve growth.

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  • Hi Rupert, thank you for taking the time to answer my question. So basically you are "selling" at a better price to generate income. You took it one step further by pointing out that it's a good practice to reinvest to something that will generate cash. Please correct me if I'm wrong.
    – spk
    Mar 10 '20 at 19:56
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You make money from growth ETF funds in exactly the same way you make money from any other investments:

  1. You buy 'em.

  2. You hold 'em.

  3. You sell 'em.

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very simply, by selling some shares.

for example, you buy 1000 Google shares at 100$ per share; after ten years, they are at 200 $ each, and you sell 100 shares to liquidate 20000 $.

In the bigger picture, there is little difference between (good) Value and Growth investments - only the timing and control of the payouts, and the tax consequences.

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  • I suppose what you mention for individual shares(Google stock in your example) is accurate for ETF funds too?
    – spk
    Mar 10 '20 at 20:00
  • Yes. I was just giving a simplified example.
    – Aganju
    Mar 10 '20 at 22:44

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