Income Stock Definition
Income Stocks, also known as dividend stocks, are equity stocks that provide consistent and regular income in the form of a dividend to their buyers. The most common features of such stocks are low volatility, regular dividend payout from the last 10 to 15 years, and regular increase in dividend payout, which show a pattern of increasing profit growth.
Although there may be a consistent increase in the dividend payout of such stocks there is a limited scope in terms of future growth of the capital invested. For this reason, it is necessary to properly analyze such companies regarding their future potential, investment, and expansion objectives. and their ability to handle risk in order to survive in case of market downturns.
Table of contents
- Income stocks, usually called dividend stocks, are equity companies that offer their buyers steady, dependable income through dividends.
- These stocks often have low volatility, a history of consistent dividend payments going back 10 to 15 years, regular dividend payout increases, and a tendency for rising profit growth.
- Although such stocks may consistently raise their dividend payout, there must be more room for the invested capital to expand.
- The plan for the investor is to create a portfolio of stocks with a history of paying a consistent dividend over several years and, ideally, will do so in the future if the goal of investing is to give a steady and regular source of income.
Income Stock Explained
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.. These are less risky forms of investments as the companies are established enough to remain stable during the bear markets than the other stocks.
Such stocks provide a continuous income through dividends from te company’s profits but have a low orlimited potential for future expansion and growth. But they attract their investors mainly because of the continuous income source which are suitable for the ones who are looking for steady and safe inflow of fund without much risk.
The businesses active or passive income stock have a stable and mature operational process that have a hold on the large part of the financial market with less competition. Their track record of profit earning capacity is reliable and strong, which make them defensive investments that can remain less affected during market downturns.
Such sectors can be public utility, telecommunication, consumer staples, pharmaceuticals, etc, that are in continuous demand in the market inspite of various geopolitical tensions, currency fluctuations, natural calamilty, and so on.
Therefore a section of investors who have a preference for steady but less income with low risk, always prefer such stocks. The dividend income stock also provide a balance in the investment portfolio against volatile, high risk-high return stocks.
How To Recognize?
Below are the main features to recognize such active or passive income stock:
- 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.
- 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 best income stock 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. 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.
The best income stock are mostly generated in sectors like telecommunication, utilities, consumer staple, healthcare, petroleum, and energy.
Let us take an example of AB ltd, which is in the beverage company with a huge turnover and has a global presence. It ihas been operating in the market for many decades and has successfully grabbed a considerable market share. The brand has an iconic image that has been able beat many small players who have entered the market with similar product.
Since it is an established company, it has been giving steady income as dividend to its shareholders. However, there has not been a very high appreciation of share prices, proving that the stock is not much affected by market fluctuations. But the demand for the product has remained relatively consistent, even during economic downturns. The company has concentrated more on meeting consumer expectations with quality products and good supply at affordable prices, rather than aggressive expansion.
Here are a few advantages of investing in these dividend income 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. 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 Income. 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.
- Dependable – Investors find such stocks dependable and stable because they are not much affected by economic, political or any other disturbances. They have the ability to consistently earn return.
- Balance in portfolio – These stocks are good for maintaining a balance in the financial portfolio of investors which may have stocks that are risky but provide good returns. In case such stocks do not perform well, the income stocks help in balancing out the losses.
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., 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 income stock portfolio 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.
Income Stock Vs Growth Stock
Above are the two categories of stocks that exist in the financial market. But they are different from each other in terms of dividend payment, risk levels, return levels, etc. Let us try to understand the basic differences between them.
|Particulars||Income Stock||Growth Stock|
|Meaning||Income Stock is companies with lesser prices and higher value.||Growth Stock is companies with higher stock prices and lesser earnings.|
|Risk||These stocks are less risky as they are already established companies.||These contain more risk.|
|Dividend Payout||Stable dividend payout.||Usually, no dividend payout.|
|ROI||Generates No or little capital gain.||Generates Higher capital gain.|
|Type of Investor||In this case, the investors are such that they are satisfied with limited income because they do not want to take a high amount of risk.||In this case, risk is acceptable for investors who are actually looking for good and fast returns in their investments.|
|Type of companies||Such companies are the ones who have good market presence, stable and matured but does not invest much in expansion and growth.||Such companies are those who are aggressively investing in growth and expansion, innovation and upgradation and thus has made substantial investment in them.|
Frequently Asked Questions (FAQs)
Income stocks are typically associated with paying relatively high dividends. These stocks are often issued by established companies in stable industries that generate consistent cash flow and have a history of distributing a significant portion of their earnings to shareholders in the form of dividends.
No, income stocks are not considered fixed assets. Fixed assets refer to tangible assets that a company owns and uses in its operations, such as buildings, equipment, or vehicles. Income stocks, on the other hand, represent ownership in a company and are classified as financial assets.
The costs associated with such a transfer are deductible if your income is treated as capital gains. Moreover, short-term profits on equity are taxed at 15%, while long-term gains are taxable if they exceed Rs 1 lakh yearly.
This has been a guide to Income Stock and its definition. We explain its differences with growth stocks example, how to recognize, strategies & advantages. You may also learn more about Financing from the following articles –