Definition of income stock

What is an income share?

An income share is a security that pays regular, often increasing dividends.

Key takeaways

  • Income stocks are stocks that offer regular and stable income, usually in the form of dividends, over a period of time with low exposure to risk.
  • Income stocks generally offer a high return that can generate the most overall returns on the security.
  • The ideal income stock would have very low volatility, a dividend yield above the prevailing rate on 10-year Treasury notes, and a modest level of annual earnings growth.
  • Income stocks are different from growth stocks, which have higher volatility and risks associated with their performance.

Understanding an Equity

Income stocks generally offer a high return that can generate the most overall returns on the security. While there is no specific breaking point for ranking, most income stocks have lower levels of volatility than the general stock market and offer sustainable and above-average dividend yields.

Income stocks may have limited future growth options, requiring a lower level of ongoing capital investment. Any excess cash flow from earnings can be directed to investors on a regular basis. Income stocks can come from any industry, but investors commonly find them in real estate (through real estate investment trusts or REITs), energy sectors, utilities, natural resources, and financial institutions.

Many conservative investors look to income stocks because they want some exposure to corporate earnings growth. At the same time, these stocks have steady streams of income that allow for a steady, low-risk source of income, perhaps for investors who are older and no longer have regular salaries.

The ideal income stock would have very low volatility (measured by its beta), a higher dividend yield than the prevailing 10-year Treasury rate (T-note), and a modest level of annual earnings growth. Ideal income stocks would also show a history of rising dividends on a regular basis to keep up with inflation, which corrodes future cash payments.

Equity example

The retail giant Walmart Inc. is an example of a revenue action. As its share price has risen over the past thirty years, the Arkansas-based company has steadily increased its dividend payment.

The company’s dividend yield peaked at 3.32% in 2015 and, as of June 16, 2021, is at 1.53%, which is higher than the T-note rate. It has achieved this performance despite the threat of e-commerce and increased competition from Amazon, which has taken away its market share.

Income stocks vs. growth stocks

While many conservative investors are targeting income stocks, those who are able and / or willing to take more risks may be better off chasing growth stocks. Unlike income stocks, growth stocks generally don’t pay dividends. Instead, company management often prefers to reinvest retained earnings in capital projects to drive future revenue and profits.

For example, a recently publicly traded tech company might choose to hire a new team of engineers or put all of its efforts for a quarter or two into launching a new product, which requires not only technical expertise but also marketing power. and sales, along with a significant customer experience to answer questions and concerns and assist with problem resolution.

While growth stocks can generate significant capital gains, they also generally carry more risk than income stocks. With growth stocks, shareholders must trust that the company’s investments pay off to generate a return on their investment (ROI). If the company’s growth is not as high as expected, shareholders may end up losing their money as market sentiment declines and stock prices fall.

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Mark Holland

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