Income Stock Definition
Income Stocks, also known as dividend stocks, are the equity stocks that provide consistent and regular income in the form of a dividend to its 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 and 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.
How to Recognize?
Below are the main features to recognize 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 dividendsDividendsDividend is that portion of profit which is distributed to the shareholders of the company as the reward for their investment in the company and its distribution amount is decided by the board of the company and thereafter approved by the shareholders of the company. 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 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. 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.
Income stocks are mostly generated in sectors like telecommunication, utilities, consumer staple, healthcare, petroleum, and energy.
Income Stock vs Growth Stock
|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.|
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 dividendDividendDividend is that portion of profit which is distributed to the shareholders of the company as the reward for their investment in the company and its distribution amount is decided by the board of the company and thereafter approved by the shareholders of the company. 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.
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 market becomes 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 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.
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 Income. These are less risky forms of investments as the companies are established enough to remain stable during the bear markets than the other stocks.
This has been a guide to Income Stock and its definition. Here we discuss strategies and how to recognize income stock along with advantages and disadvantages. You may also learn more about Financing from the following articles –