Investing 101: The Income Stock

Income stock is one of the most popular forms of stock that investors choose to put money into. Many investors like to invest solely in this type of stock as an investment strategy. Here are the basics of income stock and what it can provide you as an investor.

Income Stock

Income stock is a type of stock that regularly pays dividends to shareholders. By investing in this type of security, you will be able to create a regular source of income for yourself. Most companies that pay dividends will pay them on a quarterly basis. However, there are other companies that pay them annually or even once a month. This dividend is paid over and above any capital appreciation that you receive by investing in the stock.

Companies

When looking for income stocks, you will most likely be looking at the same types of companies. An ideal company for income stock investment is one that is large and financially sound. Most of the time, you will be dealing with companies that have been around for many years and have taken over a big portion of the market. In many cases, these companies do not have much more room for growth and they do not use much of their money to invest in capital improvements. Instead, they take the majority of their profits and give them back to the shareholders in the form of dividends.

Conservative Investors

Conservative investors tend to like income stocks. By investing in income stocks, you are taking a very low risk approach to investing in the stock market. Typically, companies that pay regular dividends like this are not prone to volatile swings in price. Instead, they tend to have slow and steady growth curves. Investors in income stocks are not looking for capital appreciation in the stock. Instead, they are relying on the dividends to bring in the return on their investment. Investors in income stocks do not have to worry about what goes on in the market as much as other investors do. They simply choose their stocks and then keep receiving dividend payments from them over the long-term. This is a buy and hold strategy of investment.

Tax Considerations

If you choose to invest in this way, you will need to take into consideration the tax implications that are involved. When you receive dividends, you will have to pay taxes on them at your regular marginal income tax rate. Dividends are considered income and they will be treated as such on your taxes. For those that buy and sell stocks over the long-term, they will pay the capital gains tax rate, which is usually lower than the marginal tax rate.

Many investors choose to reinvest their dividends into additional shares of stock when they are received. This can be a good strategy for building your portfolio, but you will need to pay taxes on the dividends even if you reinvest them.

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