Income Stock Definition Examples How It Works

Income Stock Definition

How to Recognize?

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Low Price Volatility Low volatility means the price of the stock does not fluctuate dramatically over a short period. There may be small changes in the value over the period of time. Regular Dividend Payment There is a consistent and steady payment of dividends over a period of years. Consistent Increase in Dividend Payouts An important feature of companies with good financial strength is that they are not only making regular dividend payouts but also a percentage of dividends is increasing on a regular basis. Not much Growth in Capital Invested There is very low capital appreciation.

Low volatility means the price of the stock does not fluctuate dramatically over a short period. There may be small changes in the value over the period of time.

There is a consistent and steady payment of dividends over a period of years.

An important feature of companies with good financial strength is that they are not only making regular dividend payouts but also a percentage of dividends is increasing on a regular basis.

There is very low capital appreciation.

Strategies for Managing Income Stocks

Strategies depend upon the purpose of buying the stocks.If the purpose of investing is to provide a steady and regular source of income, then the strategy for the investor is to build a portfolio of stocks that have a history of paying a regular dividend over the period of years and hopefully will continue in the future as well.If the purpose of investing is not only a regular but an increasing dividend income, then the strategy is to invest in the stock optionsStock OptionsStock options are derivative instruments that give the holder the right to buy or sell any stock at a predetermined price regardless of the prevailing market prices. It typically consists of four components: the strike price, the expiry date, the lot size, and the share premium.read more with the history of paying an increasing dividend on a regular basis.If the purpose of investing is regular income as well as the growth of capital, then the strategy should be to look out for the stocks providing regular income and adequate capital gains over the period of time.

Examples

Income stocks are mostly generated in sectors like telecommunication, utilities, consumer staple, healthcare, petroleum, and energy.

Income Stock vs Growth Stock

Advantages

Here are a few advantages of investing in these stock:

Regular and Quick Return on Investments: There is a regular dividend payment in case of income stocks. A dividendDividendDividends refer to the portion of business earnings paid to the shareholders as gratitude for investing in the company’s equity.read more is either paid on a monthly or quarterly basis.Increasing Dividend Payments: Profitable companies frequently increase their dividends. Whenever there are increased profits, companies increase their dividend payouts to their shareholdersDividend Payouts To Their ShareholdersThe dividend payout ratio is the ratio between the total amount of dividends paid (preferred and normal dividend) to the company’s net income. Formula = Dividends/Net Incomeread more. Wal-Mart Inc. is an example of a company that has raised its dividend payment to shareholders over time.Less Risk: These stocks involve lesser risk as the companies issuing such stocks are well established and are not much affected during bear markets. These are the first choice for investors who want a stable return and less risk.

Disadvantages

Here are a few disadvantages of investing in these Stocks.

No Guaranteed Dividend Payments: It is possible that the company which was performing very well at one time, stops generating enough profits to pay a dividend to its shareholders. There can be many reasons like the market becoming sluggish.Less Return on Investments: Since the company pays all the excess profits to its investors as a dividend, there is no money left for the growth of the company. Hence, no increase in stock value.Changes in Interest Rates: Increase in the interest rates leads to higher returns from bonds, fixed income investmentsFixed Income InvestmentsFixed income investment is a type of investment in which the investor receives a fixed and relatively stable stream of income in the form of dividends or interest over a period of time. Companies and governments typically issue fixed investments in the form of debt securities.read more, which in turn affect the price of income stocks and reducing the value of the investor portfolio.Inflation: Increase in the dividend may not be on par with the increase in inflation rates. So if you are completely dependent upon such stocks for your daily living, then it may be a problem.Taxes: Dividend income is taxable income. This also reduces the rate of return for the investor.

Conclusion

Income stocks are the most common components of investor portfolios due to their various advantages. It helps to maintain a regular source of income for the investors looking for Passive IncomePassive IncomePassive income is the cash flow generated by an individual with minimum or no effort at regular intervals. It gives them additional financial security while requiring some amount of hard work initially, such as maintaining rental properties, making investments, upgrading products, etc.read more. These are less risky forms of investments as the companies are established enough to remain stable during the bear markets than the other stocks.