What are income stocks? Public utilities, telecommunications, and financial management firms are most often associated with income stocks because of their high dividend payout ratios. Income stocks are stocks...
Income stocks are stocks that have a history of consistently paying high dividends in relation to the market price of the stocks. Public utilities, telecommunications, and financial management firms are most often associated with income stocks because of their high dividend payout ratios. Traditionally, many of the companies offering high dividends are mature companies that aren't expecting growth. Therefore, they don't need extra money for building, equipment, etc.
Because such companies are stable and not expanding, prices of income stocks have tended to be flat. But recently, income stocks have been doing quite well. Dividends were out of fashion for many years, but they made a big comeback during 2002 and 2003, perhaps reflecting investors' desire to find a save haven during the dark days of a bear market.
Another reason dividends are gaining popularity is that there's talk of scaling back or eliminating unfavorable tax treatment against dividends.
Income stocks tend to have lower risk than growth stocks or large-cap stocks because the companies involved are large, old, and steady. This doesn't mean, however, that a stock that has historically offered high dividends will always continue to pay high dividends. Take AT&T, for example.
For 115 years, AT&T had offered consistently high dividends. That all changed in the fall of 200 when they slashed their sacrosanct dividends. Retired people who had always counted on their AT&T dividends found themselves suddenly with a decreased cash flow. And AT&T isn't the only company letting investors down. Hasbro, First Union, and Xerox, along with many others, have cut their dividends down in the past year in an effort to prop up their sagging stock prices.
But income stocks are still out there. A recent check of Zacks Investment Research Database came up with 183 stocks with a market value of at least $400 million that yielded at least 4% (the average yield on the S&P 500 is 1.1%).
A low payout ratio gives the dividend room to grow. The payout ratio is the percentage of a company's earnings per share that is paid out as dividends in the current year. The lower the ratio is, the more room there is for potentially boosting the dividend. So, for a leading company to retain its position, it has to channel much of its earnings towards growth. And therefore, payout ratios may be lower for these stocks than they are for utilities or other companies in slow-growth industries.
If you're looking for a conservative investment, for long-term growth and a little cash flow every quarter, finding the right income stock would be a good move. Do your research, and remember the ubiquitous disclaimer: past performance does not guarantee future results.
