Income Stocks

3 Key excerpts on "Income Stocks"

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  Investing In Dividends For Dummies

  • Lawrence Carrel(Author)
  • 2015(Publication Date)
  • For Dummies

    (Publisher)

  In this chapter, I pack the essentials of dividend investing into a nutshell, starting with the bare basics, such as defining what a dividend is, and taking you to the very end — managing your portfolio after you populate it with promising dividend stocks. Along the way, I reference other chapters in this book where you can find additional information and guidance on each topic.

  Coming to Terms with Dividend Stocks

  Dividend stocks are stocks that pay dividends — payments in cash (usually) or shares (sometimes) to stockholders. Through dividend payments, a company distributes a portion of its profits to its shareholders, typically every quarter or every month, and pumps the remaining profits back into the company to fuel its growth.

  The percentage of total profits a company pays out in dividends to shareholders is called the payout ratio . For more about payout ratios and how to use the number in evaluating dividend stocks, check out Chapter 9 .

  Why companies pay dividends

  Successful companies are profitable companies. They earn money, and they can use that money in several ways:

  • Reinvest it: Companies usually invest a good chunk of their profits, if not all of them, into growing the business.
  • Pay down debt: If, in addition to selling shares, companies borrowed money to raise capital, they may use profits to pay down the debt, thereby reducing the expense of their interest payments.
  • Buy back shares: Companies may use profits to buy back shares that they feel are undervalued, or for other reasons. In some cases, they initiate buybacks to artificially inflate the share price and improve investor confidence in the company.
  • Pay dividends: Paying dividends is a form of profit sharing — spreading the wealth among the company’s owners, the shareholders.

  A company’s dividend policy generally reflects the board of directors’ and shareholders’ preferences in how to use profits. Two schools of thought govern their decision:

  • Pro growth:

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  Invest My Way

  The Business of Making Money on the Australian Share Market with Blue Chip Shares

  • Alan Hull(Author)
  • 2012(Publication Date)
  • Wiley

    (Publisher)

  Part III: Managing a blue chip share income portfolio

  Chapter 7: Introduction to income shares

  By this stage you should be very familiar with what constitutes a growth stock, how to hunt them down and how to manage them. Now we’re going to jump to the other side of the fence by investigating what constitutes an income stock or share, how to hunt them down and how to manage them.

  An income stock is one that we buy and hold for the purpose of sharing in a company’s profits rather than capitalising on the growth of its share price. To get our heads around this, we need to understand the difference between shares and the underlying companies that they represent. The difference is the crowd.

  The crowd

  The crowd is the market participants who collectively place a value on companies via their share price. That’s you and me, by the way, and unfortunately, contrary to conventional economic theory, we aren’t that efficient when it comes to valuing our assets. What this means is that the value of a company and the profits it generates aren’t directly linked.

  If 10 million shares are issued for Company D and the shares are trading at $2 each then the market capitalisation, or the value that the market places on the company, is: 10 000 000 shares × $2 = $20 million

  Now let’s assume that there is no change in the trading conditions of the company other than some speculation about a foreign competitor entering the marketplace in the future. If the shares are sold down to $1 each, then the market has halved the value it places on Company D.

  10 000 000 shares × $1 = $10 million

  The key point here is that the share price may alter substantially without any actual change in the performance of the underlying company. Supposedly, the value that market participants place on a company and the actual value of the company in terms of its assets and earnings should be pretty much one and the same — in theory.

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  Investing Explained

  The Accessible Guide to Building an Investment Portfolio

  • Matthew Partridge(Author)
  • 2022(Publication Date)
  • Kogan Page

    (Publisher)

  09

  Income investing

  Summary

  The third major investment strategy is income investing, which focuses on firms that produce a stream of dividends. The key to successful income investing is to focus on firms that can not only pay a large dividend yield, but can also grow these dividends. The best way to find such companies is to search for companies with a long-term strategy, such as family-run companies, as well as those that can deploy their capital efficiently.

  58. What is income investing?

  ‘Show. Me. The. Money’, chants Cuba Gooding Jr down the phone to Tom Cruise’s character in the film Jerry Maguire, and that phrase pretty much sums up the philosophy behind income (dividend) investing.

  While both value and growth investing tend to focus on capital appreciation (selling your shares for more than you originally paid for them), income investors care much more about the dividend income they receive from their shares than the fluctuations in the share price.

  Indeed, income investors are those who seek out companies who can pay out a high dividend relative to the share price (known as the dividend yield), but also do so consistently – and even increase them.

  In other words, dividend investors are looking for both value (as expressed by the dividend yield) but also quality (as shown by the ability to keep paying these dividends), as well as growth (the ability to increase the dividends) – with increases in price a secondary consideration.

  Of course, many firms don’t meet these criteria. Firms that are in the early stages of development don’t pay significant dividends because they won’t be making any profits, while those that are growing at an exponential rate will need to reinvest any profits. Income investors also avoid firms in severe financial trouble that may not be able to keeping paying dividends, as well as those that have such a high price that the dividend yield is tiny.

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