Income Stock

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:

  1. 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.

  2. 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.read more over a period of years.

  3. 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.

  4. Not much Growth in Capital Invested


    There is very low capital appreciation.

Income-Stock

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Source: Income Stock (wallstreetmojo.com)

Strategies for Managing Income Stocks

Examples

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

Income Stock vs Growth Stock

ParticularsIncome StockGrowth Stock
MeaningIncome Stock is companies with lesser prices and higher value.Growth Stock is companies with higher stock prices and lesser earnings.
RiskThese stocks are less risky as they are already established companies.These contain more risk.
Dividend PayoutStable dividend payout.Usually, no dividend payout.
ROIGenerates No or little capital gain.Generates Higher capital gain.

Advantages

Here are a few advantages of investing in these stock:

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 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 investments, 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 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.

Recommended Articles

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 –