Income Stocks and Your Portfolio
When you think of investing for income, your first thought may be of bonds. Certain types of equities, however, also provide income and may offer a suitable alternative for some investors. While most bonds offer "fixed income" (payments that stay the same throughout the term of the bond), the dividends paid on high-yielding stocks may increase or decrease over time.
Capital Growth or Income?
When deciding whether to include income stocks in the equity portion of your portfolio, it’s important to consider whether your primary goal is capital appreciation or income.
The capital appreciation potential of high-yielding stocks generally lags that of growth stocks, while the income potential is usually greater. With high-yielding stocks, capital appreciation isn’t the primary contributor to total return. This is because the majority of a high-yielding company’s earnings are paid out in the form of dividends rather than invested back into the company for internal growth.
Therefore, earnings and company profitability are very important factors in choosing income stocks. Generally, higher earnings and cash flow result in higher dividends. In addition, if earnings growth exceeds the inflation rate by two or more percentage points on a yearly basis, the income from future dividends has the potential to be quite satisfactory. In other words, on a total return basis, an investment in a high-yielding stock may be very attractive.
Types of Income Stocks
The following types of stocks may be worth considering if you’re seeking income.
Capital Growth or Income?
When deciding whether to include income stocks in the equity portion of your portfolio, it’s important to consider whether your primary goal is capital appreciation or income.
The capital appreciation potential of high-yielding stocks generally lags that of growth stocks, while the income potential is usually greater. With high-yielding stocks, capital appreciation isn’t the primary contributor to total return. This is because the majority of a high-yielding company’s earnings are paid out in the form of dividends rather than invested back into the company for internal growth.
Therefore, earnings and company profitability are very important factors in choosing income stocks. Generally, higher earnings and cash flow result in higher dividends. In addition, if earnings growth exceeds the inflation rate by two or more percentage points on a yearly basis, the income from future dividends has the potential to be quite satisfactory. In other words, on a total return basis, an investment in a high-yielding stock may be very attractive.
Types of Income Stocks
The following types of stocks may be worth considering if you’re seeking income.
- Regulated utilities. State boards determine the rate gas and electric utilities may charge their customers. Because of these regulations, purely regulated utilities-or those with a very small amount of non-regulated business-have little flexibility and little opportunity for earnings growth. Therefore, the value of the stock lies in its yield, which is usually higher than that of most non-utility stocks.
- Closed-end exchange-traded bond funds. Closed-end exchange-traded funds are regulated investment companies that provide many of the same important advantages as mutual (or open-end) funds, such as diversification and professional management. However, the common shares of a closed-end fund trade like stocks on an exchange-at a price that may be higher or lower. IBI