What Is an Income Stock?
An income stock is a security that pays regular, often increasing, dividends, making it a reliable source of income.
Key Takeaways
- Consistent Returns: Income stocks provide stable returns through regular dividends with low risk.
- High Yield: They often offer a high yield, generating most returns through dividends.
- Low Volatility: The ideal income stock has low volatility, a dividend yield higher than the 10-year Treasury note rate, and modest profit growth.
- Comparison: Income stocks differ from growth stocks, which have higher risk and volatility.
Understanding an Income Stock
Income stocks typically feature high yields, generating the majority of overall returns. These stocks usually exhibit lower volatility than the overall stock market and offer sustainable, higher-than-average dividend yields.
Income stocks may come from various industries, often requiring less ongoing capital investment. Excess profits are frequently returned to investors. Common sectors include real estate, energy, utilities, and financial institutions.
Ideal for conservative investors desiring low risk and consistent revenue, particularly for retirees. The best income stocks show low volatility, yield higher returns than Treasury notes, and maintain steady dividend increases to combat inflation.
Example of an Income Stock
Retail Giant Example: Walmart Inc.
Walmart Inc. serves as a prime example of an income stock. Over the past 30 years, Walmart has consistently increased its dividend payout alongside rising stock prices. The dividend yield peaked at 3.32% in 2015 and was at 1.55% by mid-2021, surpassing the yield on the 10-year Treasury note, despite challenges from e-commerce competition like Amazon.
Income Stocks vs. Growth Stocks
Conservative investors often prefer income stocks, while those seeking higher risk and potential rewards may opt for growth stocks. Growth stocks typically reinvest earnings to drive future revenue and profit rather than paying dividends.
For instance, a newly public tech firm could invest in new hires or a product launch requiring extensive resources. While these growth investments can result in significant capital gains, they also carry higher risk. Failure to achieve expected growth can cause share prices to decline as market confidence diminishes.
Related Terms: dividends, yield, volatility, capital investment, excess cash flow, real estate investment trusts, beta, Treasury note, market share, growth stock, capital gains, ROI.
References
- Macro Trends. “Walmart - 32 Year Dividend History | WMT”.
- Bloomberg. “United States Rates & Bonds”.
