Dividend-paying stocks are a great consideration for those investors seeking greater income in their stock portfolios, especially stocks with higher-than-average dividends that are known as income stocks. Income stocks take on a dual role in that they can not only appreciate but also provide regular income.
Dividends and dividend rates
When people talk about gaining income from stocks, they’re usually talking about dividends. A dividend is nothing more than money paid out to the owner of stock. You purchase dividend stocks primarily for income — not for spectacular growth potential.
Dividends are sometimes confused with interest. However, dividends are payouts to owners, whereas interest is a payment to a creditor. A stock investor is considered a part owner of the company he invests in and is entitled to dividends when they’re issued. A bank, on the other hand, considers you a creditor when you open an account. The bank borrows your money and pays you interest on it.
A dividend is quoted as an annual number but is usually paid on a quarterly basis. For example, if a stock pays a dividend of $4, you’re probably paid $1 every quarter. If you have 200 shares, you’re paid $800 every year, or $200 per quarter. Getting that regular dividend check every three months (for as long as you hold the stock) can be a nice perk.
A good income stock has a higher-than-average dividend (typically 4 percent or higher).
Dividend rates aren’t guaranteed — they can go up or down, or in some extreme cases, the dividend can be discontinued. Fortunately, most companies that issue dividends continue them indefinitely and actually increase dividend payments from time to time. Historically, dividend increases have equaled (or exceeded) the rate of inflation.
Who’s well-suited for income stocks
What type of person is best suited to income stocks? Income stocks can be appropriate for many investors, but they’re especially well-suited for the following individuals:
Conservative and novice investors: Conservative 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, whereas 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: For those investors who like to compound their money with DRPs, income stocks are perfect.