Investing for Income
Investing for income means investing in stocks that will provide you with regular money payments (dividends). Income stocks may not offer stellar growth, but they're good for a steady infusion of money. What type of person is best suited to income stocks?
- Conservative and novice investors: These investors like to see a slow-but-steady approach to growing their money while getting regular dividend checks. Novice investors who want to start slowly also benefit from income stocks.
- Retirees: Growth investing is best suited for long-term needs, while income investing is best suited to current needs. Retirees may want some growth in their portfolios, but they're more concerned with regular income that can keep pace with inflation.
- Dividend reinvestment plan (DRP) investors: A DRP is a program that a company may offer to allow investors to accumulate more shares of its stock without paying commissions. For those who like to compound their money with DRPs, income stocks are perfect.
Income stocks tend to be found in industries with established cash flows and less emphasis on financing or creating new products and services. When you start searching for a great income stock, look at utilities and real estate trusts for high-dividend stocks.
You won't find too many dividend-paying income stocks in the computer or biotech industries because these types of companies need a lot of money to finance research and development projects to stay ahead of the curve.
Utilities generate a large cash flow, which includes money from income (sales of products and services) and other items (such as the selling of equipment). This cash flow covers things such as expenses, including dividends. Utilities are considered the most common type of income stocks, and many investors have at least one in their portfolios.
Real estate investment trusts (REITs) are a special breed of stock. A REIT has the elements of both a stock and a mutual fund. It's like a stock because it's a company that is publicly traded on the major stock exchanges, and it has the usual features that you expect from a stock — it can be bought and sold easily through a broker, income is given to investors as dividends, and so on. A REIT resembles a mutual fund because it doesn't make its money by selling goods and services; it makes its money by buying, selling, and managing an investment portfolio full of real estate investments. It generates revenue from rents and property leases. In addition, some REITs own mortgages, and they gain income from the interest.
REITs are called trusts because they meet the requirements of the Real Estate Investment Trust Act of 1960. This act exempts REITs from corporate income tax and capital gains taxes as long as they meet certain criteria, such as dispensing 95 percent of their net income to shareholders. This provision is the reason REITs generally issue generous dividends. Beyond this status, REITs are, in a practical sense, like any other publicly traded company.