What Is an Income Stock?

What Is an Income Stock?

Let me explain what an income stock is directly to you: it's a security that pays out regular dividends, and these dividends often increase steadily over time.

Key Takeaways on Income Stocks

You should know that income stocks deliver regular and steady income, typically through dividends, and they come with low risk exposure over time. These stocks usually provide a high yield that can make up most of the security's total returns.

The perfect income stock for you would show very low volatility, a dividend yield beating the current 10-year Treasury note rate, and just a modest amount of annual profit growth. Remember, income stocks stand apart from growth stocks, which carry higher volatility and risks tied to their performance.

Understanding an Income Stock

Income stocks generally offer a high yield that generates the majority of the security's overall returns. While there's no exact cutoff for what qualifies, most have lower volatility than the broader stock market and provide sustainable, above-average dividend yields.

These stocks might not have much room for future growth, so they don't need heavy ongoing capital investment. Instead, any extra cash from profits goes straight back to you as an investor on a regular basis. You can find income stocks in various industries, but they're common in real estate through REITs, energy, utilities, natural resources, and financial institutions.

If you're a conservative investor, you might turn to income stocks for some exposure to corporate profit growth while enjoying steady revenue streams that keep risks low and provide consistent income—especially if you're older and no longer earning a salary.

The ideal income stock has very low volatility, measured by its beta, a dividend yield higher than the 10-year Treasury note rate, and modest annual profit growth. It should also have a track record of regularly increasing dividends to stay ahead of inflation, which can erode the value of future payments.

Example of an Income Stock

Take Walmart Inc., the retail giant, as a clear example of an income stock. Over the past thirty years, as its stock price has climbed, the company based in Arkansas has consistently raised its dividend payouts.

Its dividend yield hit a high of 3.32% in 2015, and as of July 16, 2021, it stands at 1.55%, which still beats the yield on the 10-year Treasury note. Walmart has maintained this despite challenges from e-commerce and competition from Amazon, which has chipped away at its market share.

Income Stocks vs. Growth Stocks

While conservative investors like you might prefer income stocks, if you're willing to take on more risk, growth stocks could be a better fit. Unlike income stocks, growth stocks typically don't pay dividends; instead, management reinvests earnings into capital projects to drive future revenues and profits.

For instance, a newly public tech company might hire a team of engineers or focus all efforts for a couple of quarters on launching a new product, which demands not just technical skills but also marketing, sales, and strong customer support for handling questions, concerns, and troubleshooting.

Growth stocks can deliver big capital gains, but they come with more risk than income stocks. With them, you as a shareholder depend on the company's investments succeeding to get a return on investment. If growth falls short of expectations, you could lose money as market confidence drops and share prices fall.