What Are Income Producing Stocks?

Almost all industries in the stock market that you can invest in will pay out dividends in income stocks. However, some industries have higher paying dividend stocks than others.

For example, you are unlikely to find many computer or biotech companies with dividend income stocks, because these types of companies need to keep money in order to do expensive research and development (R&D) so that they can create new products.

If such companies were unable to do this, they wouldn’t be able to do R&D and so they wouldn’t produce any new products which will cause their earnings to gradually decline as a result.

In this article, we will look at some of the industries in which you can make a good return in the stock market by purchasing income stocks that pay dividends.

Utility Companies

Utility companies are a good form of income stock investment, because utilities earn a large continuous revenue due to the fact that people require their services for everyday living.

Utilities companies are the most common form of income stocks, and most investors will have at least one in their investment portfolio.

Some investors will invest in their local utility companies, that way, when you pay the bill, you know that you are benefiting in the long run because you are supporting a company you are invested in.

But before you run off and buy some stocks in a utility company, keep in mind the following three points:

1 – Company’s Financial Condition

Any company you invest in should be making money and have a positive trend in terms of sales and earnings from year to year.

2 – Company’s Dividend Payout Ratio

Since utility companies have a good cash flow, it is not uncommon for utilities to have dividends which reach a 70% payout ratio.

If you are concerned about the safety of your investment, choose a company with a lower payout ratio.

3 – Where The Company Is Based

If a utility company covers a prosperous area which shows signs of growth in terms of population, then there is a good chance your stocks are likely to perform well.

If however that company covers an area with a shrinking population, the value of your investment is likely to decline over time.

Real Estate Investment Trusts

Real estate investment trusts (REITs) are a hybrid between a stock and a mutual fund.

A REIT is like a stock because it represents a company whose stock is publicly traded on the stock market. As a result, you can buy stock from your broker and receive income in the form of dividends.

A REIT is like a mutual fund because REITs don’t make money selling goods and services, but rather by buying, selling and managing an investment portfolio which in this case, contains real estate investments.

The money is generated from rents, property leases and interest from mortgages.

Some of the major advantages of investing in REITs include:

Easy To Buy And Sell

This is a very easy form of investing because stocks are easy to buy. This can be done by calling a stock broker or going to a broker’s website.

High Yields

REITs tend to have higher than average yields. Typically you can expect to get anywhere between 5 to 12 percent.

Low Risk

Purchasing real estate directly can be quite risky, especially in today’s economic climate.

REITs can help to reduce this risk because you are not purchasing real estate directly, which means you won’t have to worry about managing the properties as this is done for you.

Also, because an REIT doesn’t just manage one property but several, your risk is spread out which increases the overall safety of your investment.

Affordable

REIT shares usually trade between $10 and $40. This makes them very affordable for small investors who don’t have a lot of money to invest in the stock market.

Look What Your REIT Is Investing In

When investing with an REIT pay attention to what they are investing in, and analyse what they do similar to how you would analyse a property.

If your REIT is investing in shopping malls and shopping malls are increasing in your area, then you can expect your investment to perform well.

If however your REIT invests in office buildings but these are decreasing in number, then your investment may not perform so well.

Royalty Trusts

As energy prices rise due to increasingly higher energy demands from developing countries, the value of energy companies in the stock market have increased steadily over the years.

Some income investors have capitalised on the rising energy prices by investing in energy stocks called royalty trusts.

A royalty trust is a company that holds assets such as oil or gas rich land, and makes money by earning a fee from companies who use this land.

These fees are then paid to the royalty trust which is distributed via dividends to the shareholders.

Typically, such dividends paid out yields in the 8-12 percent range, which can be very tempting if interest rates of other forms of investments are low.

However, it is worth bearing in mind that such royalty trusts have very high payout ratios (sometimes as high as 90-100 percent), which makes them a risky investment should the cash flow of the energy companies begin to decline.