What Are Income Stocks?

As a stock market investor there are different types of investments you can make.

One such investment is investing for income, which means that you buy stock which will provide you with regular money payments (dividends).

Although income stocks may not be the fastest way to make money on the stock market, they are a good way to provide yourself with a valuable additional stream of income.

Who Should Invest In Income Stocks?

Income stocks are particularly suited to the following types of investors:

Novice/Conservative Investor

A conservative investor is someone who would like to invest in the stock market, but at the same time not take too many risks. They prefer to grow their money slowly and safely.

The same applies to novice stock market investors, as income stocks offer them a gentle introduction to stock market investing without putting their finances in jeopardy.

Retirees

If you are investing in income stocks, you are generally in it for the long run. Income stocks are therefore perfect for people who are planning their retirement, and want a steady stream of income to see them through their retirement years.

Dividend Reinvestment Plan (DRP) Investors

For investors who like to compound their money with DRPs, income stocks can provide a good opportunity to do so.

Overall, anyone who wants to invest in the stock market, would like to minimise their risk and doesn’t mind staying in for the long run would benefit from investing in income stocks.

Dividends

If you hear a person talk about making an income from the stocks they buy in the stock market, they are usually talking about dividends.

A dividend is simply money that is paid out to the owner of a stock. Dividend stocks are therefore purchased as a means of income, rather than for their growth potential.

Dividend stocks are usually paid out every quarter, and the dividend rates can vary and sometimes they can even be discontinued.

Most companies however, issue dividends continuously and will increase the dividend payments over time. This increase in dividend payouts has historically exceeded the rate of inflation.

Advantages

Although the stock market can be a very unpredictable place when it comes to making successful investments, income stocks are generally considered to be low risk and relatively stable.

Income stocks are sometimes called “defensive stocks”, which is a term used to describe the stocks of companies that sell goods and services which will be needed regardless of what state the economy is currently in.

For example, stocks from food, drink and utility companies are defensive stocks. People need to buy these products and services in order to stay alive and go about their everyday routine.

Some of the best known industries for dividend stocks are electric, gas, water and oil companies.

Disadvantages

Whilst income stocks certainly are a good long term investment in the stock market, they are not without their flaws.

Some of the disadvantages of investing in income stocks include:

Possibility Of Decreased Market Value

Just like any other stock you can buy in the stock market, income stocks can go up as well as down.

Some of the factors which can affect the performance of income stocks, and other types of stocks, include politics, economic trends and industry changes.

The good news however, is that the value of income stocks tends to fall less dramatically than the prices of other stocks in a declining market.

Sensitivity To Interest Rates

Interest rates can go up and down and income stocks are sensitive to such fluctuations.

For example, if your income stock is giving a 4% rate of return and interest rates are 5% or higher, investors are likely to sell their low yield stock which causes the price of those stocks to fall.

In addition to this, rising interest rates can affect a company’s earnings, which may then affect the dividends you receive from them.

Inflation

If you are investing in income stocks as a secondary source of income, inflation can affect the value you receive from those stocks.

For example, if you are yielding 3% on your stocks and this rate does not change but at the same time inflation rises to 6%, then because your cost of living has increased the value of your dividend income decreases.

Some companies continually raise their dividends, but some don’t. So make sure you are aware of this when investing in income stocks.

Tax

Dividends are usually taxed as income which will then be subtracted from the value you receive from them.