Income Stock is a form of security which provides regular dividends to the investors. This dividend steadily grows over time to adjust for dividend to inflation. Such stocks are mostly issued by companies with stable cash flow and well-established financial infrastructure. These companies have large market capitalisation and usually operate at a mature stage in their growth graph.
Market Capitalisation is a method employed to quantify the value of a company. The methodology uses two variables – outstanding shares of a company and the price of each share.
According to this method, there are primarily three types of companies – large-cap companies, mid-cap companies, small-cap companies. The most likely issuers of income stocks are large-cap companies. According to SEBI guidelines, the classification of companies as per market capitalisation value is demonstrated in the table below.
|Large-cap companies||Above Rs. 20,000 Crore|
|Mid-cap companies||Within Rs. 5,000 – 20,000 Crore|
|Small-cap companies||Below Rs. 5,000 Crore|
As income stocks are mostly large cap companies, they are well established in their domains to the extent that they have amount to payout to their shareholders, as opposed to growth stocks that reinvest their profits into the expansion of business instead of disbursing dividends.
Some key characteristics of income stocks are listed below –
Companies that enfranchise trading stocks for income, do it so for the purpose of goodwill. Allowing dividends every year along with increasing it for the sake of inflation portrays the issuer company as financially stable, thus inciting a positive sentiment amongst investors.
This rise in goodwill, in turn, encourages investors to employ their capital in the company’s stocks which strengthens their financial fortitude, allows for greater productivity and aids in sustaining economic crises and stiff competition.
One such instance is how Walmart bested online market by offering higher dividends on their income stocks. It encouraged more investors to pour in their capital for the purpose of share market income, thus providing Walmart with the financial support to survive against online market blitzkrieg, especially from Amazon.
Investors who want to earn a regular income from the stock market as well as have a low-risk appetite can consider going for Income Stocks .Here are a few features of Income stocks that make them a good investment option for such investors.
Income stocks are often considered as defensive stocks by investors. These stocks belong to industries that remain in business irrespective of the market condition. Food and beverage is an exemplary industry that issues defensive income stocks; others being, electricity, gas, etc.
The above mentioned goods and services are required across varying phases of market fluctuations and, therefore, such stocks are less reactive to market volatility. You can invest in such stocks to lower the risk factor in your portfolio and receive assured stock market income albeit a bearish market.
Some industries offer above-average dividends on their stocks. This scale of dividend payment is frequently seen in industries such as electricity, gas, water and the energy sectors. High share market income can also be found in the Real Estate sector which issues income stocks in the form of Real Estate Investment Trusts (REITs).
Inclusion of income stocks in your investment portfolio will allow the balance of risk and reward elements in it. Also, in the case of market contractions, it will buoy your stock market income and keep your investment capital immune to volatility to avoid losses.
Although income stocks offer a host of advantages, not all of them can be considered convenient for investors. While some disadvantages are inherent to all stocks of this nature, some are pertinent to particular industries or companies. A few of them are –
Here is a list of alternatives to income stocks:
These are some alternative investment options you can look into; given you find income stocks inconvenient.
As mentioned above, Income stocks can prove to be a great investment avenue provided you have sufficient investment capital, want a steady income from your stock market investments and have a low risk appetite. That being said, investing in income stocks is not immune to market risks . While selecting the best income stocks, make sure you do your research thoroughly and choose companies with sound fundamentals.