Why Are Income Stocks Good to Invest In?
Dividend-paying stocks continue to reward investors with income, often in the midst of lackluster stock market performance. Income stocks pay dividends in the form of cash or additional shares, and some investors rely on these distributions for their livelihoods.
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Components
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The total return of a stock is based on two components: the dollar-per-share value and the dividend payout. The dividend payout, or income, is a quarterly or yearly distribution in the form of cash or stock that is given to shareholders as a reward based on a company's cash position. It is considered taxable income by the U.S. government.
Features
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One important feature of income stocks is their relative safety. Management usually has figured out how to preserve cash for shareholders, even in the midst of a stock market downturn. Investors are often granted a safer investment, additional income and overall better returns in exchange for investing in income stocks.
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Reinvesting
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Investors have an option to receive cash distributions or to use the payout to reinvest in a company. By reinvesting in a growing company, an investor adds to the number of shares held and is augmenting the overall return, according to The Motley Fool.
Benefits
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Although cash distributions can be interrupted at the request of a company's board of directors, some of the most prestigious companies in the world have paid uninterrupted quarterly dividends for decades. Many companies are disciplined enough with cash flow to increase dividend payouts annually.
Considerations
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Keep in mind that a company can cut its distribution at any time. Some of the warning signs that a dividend cut is ahead include increased debt on a company's balance sheet or changes in income patterns. If companies that historically raise payouts stop increasing their dividends, the dividends might eventually be halted altogether.
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- Photo Credit Image by Flickr.com, courtesy of Casey Serin
