The average investor can investor for 2 things, which are capital gains or cash flow.
If you own a stock and hopes it goes up in value to sell it at a higher price. When the investor sells at a higher price, that is considered a capital gain. If the investor sells the stock for less than what they paid for it, that would be considered a capital loss. The thing with this type of investing, is that when you sell, you MUST go out and buy another asset.
A good example of capital gain is the purchase of physical gold or silver. These two investments do not yield any cash. These investments must go up in value in order for the investor to make a profit when they sell. These precious metals are used sometimes by investors to hedge against the US dollar.
When an investor owns a mutual fund or ETF, they might end up with a capital gain to report on their tax returns, even if they never sold any units of the mutual fund or ETF. The reason for this is the mutual fund or ETF, might end up with a net capital gain for all their buy and sell transactions. The mutual fund or ETF pass this on to investor.
When an investor invests for cash flow, they want to get paid. This payment of income can be interest, dividends, option premiums, or distributions. Interest payments come from bonds, bond ETFs or bond mutual fund. Dividends are payments that come from equity ownership in a company. Distributions is a form of payment that can come from things such REITs, mutual funds, and ETFs. Option premiums are paid to the sellers of options up front.
Depending on the form of payment, the tax treatment of the income varies. A payment of interest is taxed as ordinary income, or at your marginal tax rate. Dividends can be taxed differently depending on a couple of things. For Canadians, if they own a Canadian company's stock, the dividend will be taxed more efficiently than interest income. If Canadians own a foreign stock, the dividend is taxed the same as interest income. When distributions are paid out, the payments can consist of interest, dividends, capital gains, and return of capital.
Option premiums that are collected are basically capital gains. I am not going to get into options here as it can be more complex than the other types of cash flow.
Capital Gains or Cash Flow? What is better?
For me, I invest for cash flow mostly. Every month or quarter, I receive a payment. If I do not sell the position, that asset will continue to pay me unless the company, fund or ETF's stop paying dividends, distributions or interest. I will use stock ownership as an example here. Some companies will increase their dividend over time. These increases are usually higher than the rate of inflation. I can choose to do what ever I want with these payments. When the cash flow from my investments are greater than my expenses, then I will be be out of the rat race and financially free.
For capital gains, I trade a stock or option in the hopes of making a profit. I then have to turn around and purchase another position, buy an option, or sell an option.
A good example of dividend growth investing is Grace Groner. Grace bought 3 shares of Abbott Laboratories in 1935 and reinvested all the dividends. With capital appreciation, dividend increases and stock splits, this investment grew to over 7 million dollars. You can read about Grace Groner here.
Note: Currently, I sell put options only on stocks I want to own at a lower price. The option premium I receive is a way to make money why waiting to see if the stock falls in value or not. If the stock does not fall below the strike price, I let the option expire. I get to keep the option premium.