A Publication of WTVP

When you think of investing for income, your first thought may be of bonds. Certain types of equities, however, also provide income and may offer a suitable alternative for some investors. While most bonds offer "fixed income" (payments that stay the same throughout the term of the bond), the dividends paid on high-yielding stocks may increase or decrease over time.

Capital Growth or Income?

When deciding whether to include income stocks in the equity portion of your portfolio, it’s important to consider whether your primary goal is capital appreciation or income.

The capital appreciation potential of high-yielding stocks generally lags that of growth stocks, while the income potential is usually greater. With high-yielding stocks, capital appreciation isn’t the primary contributor to total return. This is because the majority of a high-yielding company’s earnings are paid out in the form of dividends rather than invested back into the company for internal growth.

Therefore, earnings and company profitability are very important factors in choosing income stocks. Generally, higher earnings and cash flow result in higher dividends. In addition, if earnings growth exceeds the inflation rate by two or more percentage points on a yearly basis, the income from future dividends has the potential to be quite satisfactory. In other words, on a total return basis, an investment in a high-yielding stock may be very attractive.

Types of Income Stocks

The following types of stocks may be worth considering if you’re seeking income.