What are income stocks?
Income stocks are the securities that provide regular dividend payments to investors and the dividends steadily grow over time to adjust for the dividend to inflation. They are also known as dividend stocks.
It is usually companies with stable cash flows and well-established financial infrastructure that issue such stocks. These companies have large market capitalization and they usually operate at a mature stage of their growth graph.
Usually, income stocks offer a high dividend yield that may generate the majority of the overall returns of the security. Most income stocks are less volatile than the overall stock market.
It is possible for income stocks to have limited future growth options thereby requiring a lower level of ongoing capital investment. Any excess cash flow from profits can be directed back to investors regularly. These stocks can come from any industry, however, investors commonly find them within real estate through real estate investment trusts (REITs), energy sectors, utilities, natural resources, and financial institutions.
Many conservative investors look for income stocks because they want to gain some exposure to corporate profit growth. At the same time, these stocks have steady streams of revenue that allow for a low-risk and consistent source of revenue, probably for older investors who no longer have regular salaries.
The ideal income stock’s volatility would be very low as measured by its beta, a dividend yield higher than the 10-year Treasury note rate (T-note rate), and a modest level of annual growth in profit. Also, ideal income stocks would show a history of increasing dividends on a regular basis in order to keep up with inflation.
Income stocks examples
- Retail Behemoth Walmart
- Realty income stocks
- NextEra Energy
Retail Behemoth Walmart
Retail behemoth Walmart Inc. is a good example of income stocks. Its stock price has risen over the last thirty years and the company has consistently increased its dividend payout. Its dividend yield peaked at 3.32% in 2015 and as of July 2021, the yield is at 1.55% which is superior to the yield on the 10-year T-note. It was able to achieve this yield despite the threat of e-commerce as well as increased competition from Amazon which has taken away its market share.
The wireless subscribers of telecommunications titan Verizon Communications provide a reliable revenue base and cash flow. Through the first nine months of 2021, Verizon was able to generate an impressive free cash flow of $17.3 billion. That made funds available for it to reward its shareholders with close to $8 billion in dividends.
The shares of Verizon offered a hefty dividend yield of more than 4.5% of the company’s share price in 2022. Also, the telecom giant has increased its dividend for fifteen straight years. Because of the attractive and growing income stream, Verizon stocks become a great one for earning passive income.
Microsoft is the technology industry leader and has several revenue generators which is a great privilege for income investors. The Windows computer operating system continues to generate huge profits; its popular Office software, which is massively productive, is enjoying renewed growth due to the product’s transition to a delivery model that is cloud-based.
The Azure cloud infrastructure business of Microsoft is expanding rapidly and LinkedIn which is owned by the company is growing rapidly as well. The income of the company is likely to continue growing in the coming years. In 2022, Microsoft agreed to purchase gamemaker Activision Blizzard to support its gaming platform.
Microsoft’s dividend yield is increasing quickly. In 2021, the company boosted its dividend by 11%, and for nineteen consecutive years, it raised its payout. This track record makes Microsoft a great option for those seeking an income stock with dividend growth potential.
Realty Income, over the years, has been a dependable income stock. The dividends of the real estate investment trust (REIT) have increased more than 110 times since its initial public offering (IPO) in 1994. It has delivered over 25 years of dividend growth which made it fall into the elite category of a dividend aristocrat.
NextEra Energy is another company that has an excellent income track record. The utility is also a dividend aristocrat with over 25 years of consistent growth in dividends. Since 2005, the company has increased its dividend payout at an annualized rate of 9.65. It is one of the leaders in the production of renewable energy with an extensive backlog of development projects. When that growth is combined with the stability of its utility operations, NextEra should have enough power to keep expanding its earnings and dividends in the future.
Features of income stocks
- Low price volatility
- Regular dividends
- Consistent dividend payout increase
- Low capital appreciation
- Low risk
- Sensitive to interest
Low price volatility
This means that the stock price does not fluctuate dramatically over a short period, there may be little changes in the value over the period of time.
Income stocks provide regular dividend payments on shares over a period of years. The regular disbursement of dividends enhances the confidence of investors which in turn encourages additional investment.
Consistent dividend payout increase
Companies that have good financial strength do not only make regular dividend payments, they increase the dividend payouts on a regular basis to cope with inflation.
Low capital appreciation
There is little growth in capital invested. Market fluctuations affect stocks in intensity lower compared to other forms of stocks. Therefore, the price of appreciation is relatively limited in this instance.
Income stocks have a lower risk compared to other forms of equity stocks.
Sensitive to interest
The values of income stocks are sensitive to changes in interest rates offered on fixed-income securities most especially bonds. Investors are ready to shift to fixed-income securities if they offer a higher rate of interest. This is easily noticed during market fluctuations when there is a decline in corporate gains.
Types of income stocks
- High-yielding dividend stocks
- Low-yielding dividend stocks
High-yielding dividend stocks
High-yielding dividend stocks refer to the stocks of companies with a long history of paying high dividend yields. These companies have a steady stream of cash flow and can afford to pay higher dividend yields.
Low-yielding dividend stocks
Although dividend stocks usually have high dividend yields, there are low-yielding dividend stocks. These are the income stocks of companies that payout low or moderate dividend yields. generally, such companies have a stable financial position and they reinvest their cash flows into their business so they can expand and grow.
Advantages of income stocks
- Regular and quick ROI
- Increasing dividend payouts
- Low risk
Regular and quick ROI
In the case of income stocks, there is a regular return on investment or dividend payment. Investors can receive their dividends on a monthly or quarterly basis.
Increasing dividend payouts
Companies that are profitable frequently increase their dividends. Whenever the company experiences an increase in profit, its dividend payouts to shareholders definitely increase.
Income stocks involve lower risk because the companies issuing such stocks are well established and are not so affected during bear markets. Therefore, these stocks are the first choice for investors who want a stable return and less risk.
Disadvantages of income stocks
- No guaranteed dividend payments
- Less ROI
- Interest rate changes
No guaranteed dividend payments
It is possible for a company that is performing very well at one time to stop generating profits to pay dividends to its shareholders. One of the reasons for such can be a sluggish market.
Since all excess profits are paid to investors as dividends, there will be no money left for the growth of the company. Hence, there will be no increase in stock value.
Interest rate changes
Income stocks are sensitive to interest rates, therefore, an increase in interest rates brings about higher returns from bonds and fixed-income investments. This in turn has an effect on the price of income stocks thereby reducing the value of the investor portfolio.
An increase in the dividend may not be of equal value to the increase in inflation rates. So if one is totally dependent on such stocks for his daily living, then it may be a problem.
The income of dividends is taxable thereby reducing the rate of return for the investor.
Income stocks vs growth stocks
One difference between income stocks and growth stocks is that income stocks pay dividends while growth stocks do not.
Another aspect in which they differ is the aspect of risk. Income stocks are less risky because they are already established companies, while growth stocks contain more risk.
While income stocks generate little or no capital gain, growth stocks generate a higher capital gain.
What do income stocks mean?
Income stocks are stocks that provide a regular and steady income for the investor in the form of dividends over a period of time with low-risk exposure. Generally, they have high dividend yields.
What’s the difference between growth and income stock?
One of the areas in which growth stocks and income stocks differ is in the aspect of dividend payments. Growth stocks do not pay dividends while income stocks pay regular and stable dividends. Also, growth stocks have higher risk exposure than income stocks. Income stocks generate little or no capital gain while growth stocks generate a high capital gain.
Is Realty income stock a good buy?
Realty income stocks have a track record of increased dividends for over 25 years. With this, we can say that the stocks are good for investors who want a passive income.
What unique characteristics do income stocks have?
One unique characteristic that income stocks have is that they pay regular dividends to investors and these dividend payouts increase over time. Other features include less risk exposure, low capital appreciation, sensitivity to interests, and low price volatility.