Income Investing

Tampa, Florida Stock and Bond Investment Fraud Attorney, Russell L. Forkey, Esq.

There are numerous types of investment philosophies that are used by the investing public and professional advisors.  One such investment discipline is referred to as "income" investing.  The purpose of this post is to provide certain general information concerning this strategy.  This post is not designed to be complete in all material respects.  It is being provided for educational purposes only and should not be relied upon as  legal or financial advice.  If you have any questions relative to the below discussion, you should contract a qualified professional relative thereto.

  Income Investing:

The premises behind income investing is to pick companies that provide a steady stream of income.  This can be accomplished in various ways such as investing in:

  • dividend paying common stocks
  • preferred stocks
  • U.S. Treasuries
  • corporate bonds
  • junk bonds
  • municipal bonds
  • convertible bonds
  • equipment trust certificates
  • partnerships
  • income orientated mutual funds

Obviously, as with all investment strategies, there are varying degrees of risk associated with this concept, which are enhanced by the use of margin and the active oversight of the positions in one's account.

The balance of this post will focus on income generated by common stocks. 

Income investors usually focus on older, more established firms, which no longer are in rapidly expanding industries and so instead of reinvesting retained earning into themselves and pay out retained earnings as dividends. 

As a starting point to try and identify such companies, there are a number of things that a potential investor can review.  The following list identifies a few:

  • review information from reputable rating services
  • review information relating to the company contained on the SEC Edgar website, including the company's most recent annual filings.
  • pay particular attention to the company's financial disclosures, including the audited annual financial statement

Dividend Yield:

Income investing is not based, on the concept, of investing in companies that pay the highest dividends.  The more important factor is the dividend yield, which is calculated by dividing the annual dividend per share by the share price.  This measures the actual return that a dividend gives the owner of the stock.

Dividend Policy:

It is important for the investor to know what the company's past dividend policy has been.  Income investors must attempt to determine whether a company that they are looking at can continue paying its dividends.  The longer that a company has been paying a good dividend, the more likely it will continue to do so in the future.

Other Factors to Consider:

Even though you are looking for income, it is important to keep in mind that these yields are only worth something if they are sustainable.  Consequently, income investors must be sure to analyze their company choices carefully, buying only those that have good fundamentals

Please Note:

1.  Your overall return will be impacted by taxes.

2.  The risk associated with any equity still applies to those with dividend yields.

3.  Like all investment strategies, there is no set formula for finding a good company.  Each individual investor must use their own interpretive skills and personal judgment.