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Income
Investing
Income investing, relating to equities, is mostly about yield. Pure income
investors choose high yields.
The yield is the amount of annual income earned from
investments, expressed as a percentage. Young adults, because of their age
and risk tolerance, normally emphasize growth over income investments.
Nevertheless, common stock, as an income vehicle, is attractive as it can
provide both an income stream and capital appreciation.
Equity income investors focus on dependable,
non-cyclical, dividend paying companies with strong financials, a recurring
customer base, a growing business model, and a demonstrated ability and
intent to increase dividends as earnings grow. Companies like Johnson and
Johnson and Citigroup fit this model. This strategy is usually used by the
more mature, long-term investor, who requires a cash flow to cover living
expenses and upside potential through dividend increases and share price
appreciation, to mitigate the risk of inflation. Income oriented investors
should be mindful of the following:
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Preservation of capital is critical.
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Choosing high yields while risking principal is always a bad
decision. The higher the yield the greater the risk.
·
Interest rates move inversely to principal.
“Avoid companies with extremely high stock yields,
erratic dividend trends and unreasonably high dividend payout ratios.
Normally, these are signs of trouble ahead.”
Risk tolerance is an investor's ability to handle
declines in one's investments. Price swings can be very risky and unnerving
for many. Therefore, for the more conservative young adults, a balanced
approach of income and growth is recommended. Dividends provide downside
protection in a declining market, while common stocks have potential for
capital appreciation and dividend increases. Over time, this approach can be
extremely rewarding.
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