Income Shares
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Income Shares, unlike growth or value, are not expected to deliver returns via capital appreciation. Income shares deliver dividends for their returns. When you are investing in Income Equities you will prefer to receive dividends annually. Capital appreciation merely provides a bonus, but is not the focus. Income Shares pay substantially higher dividends than value or growth shares, which typically reinvest their leftover earnings. Income shares pay dividends consistently, quarter after quarter, and year after year. The consistency is important: Shares which lose their dividends or have dividend rates reduced will serve no purpose as income shares.
Since income shares are primarily based on the payment of dividends, firms must be able to afford the dividend payments. Look for stable firms, which typically are large or mega-capitalization, with high net income. These firms have high sales, low expenses, and extremely low debts. They have high amounts of cash left over after all expenses. This pool of residual earnings pays dividends. You must always review a firm’s fundamentals, specifically the Cash Flow and Income statements.
Your goal is to ensure a firm can afford to maintain or expand their dividend payments. If the firm’s market is sustainable and the costs are stable, the dividends may last. If the market slows down or expenses rise, the dividends will be reduced or end. Lastly, you should pay attention to the firm’s bond rating, since a lowered bond rating can be an indicator of financial difficulties which threaten your dividend stream.
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