What is Income Stock?
An income stock is a stock in which a taxable payment is declared by a company's board of directors and is given to the shareholders from the current or retained earnings that occur, usually on a quarterly basis.
How Does Income Stock Work?
For example, let's say that Company XYZ generated $40 million of cash this quarter. Its board of directors may declare a $0.10 per share dividend, which it has done regularly for the last 10 years. This dividend is paid to the shareholders of the company, many of whom have relied on those dividend payments for their day-to-day living expenses. This regular stream of income makes Company XYZ an income stock. Dividends usually come in the form of cash, but they can come in the form of stock.
Why Does Income Stock Matter?
A key to picking income stocks is to find those companies that have a history of paying a steady, uninterrupted dividend over many years. Most companies that have a consistent history of paying dividends are committed to continuing that policy. Each company should have a consistent five- to 20-year history of either paying its dividend or raising it. This is a sign of financial strength because a company needs cash in order to pay a dividend consistently over a long period of time. Also, a rising dividend usually means that a company has shown promising growth in the past and can be trusted to deliver solid earnings in the future. For these reasons, income stocks are common components of retirement portfolios, though other investors find them attractive because companies that pay dividends steadily over long periods of time usually are more stable during bear markets than other stocks.
