Income Stock

An income stock is one purchased primarily for income, which is paid out in the form of dividends. Income stocks tend to be among the least volatile of all stocks, and many investors view them as defensive in nature. These are typically very large, established firms, often in staid or highly regulated businesses. The advantage of income stocks, in addition to their stability, is that even if the stock isn't doing much, you're getting that nice regular dividend. Yet unlike a bond, the stock still gives you some potential for capital appreciation as well. The down side is that such stocks can be sensitive to rising interest rates, which make the dividend look less attractive versus riskless Treasury securities and certificates of deposit. Such stocks can also be sensitive to inflation, which erodes the buying power of the dividend. Also, industries that once looked very stable have become less so in a deregulated and increasingly global economy. Electric power utilities, for example, once steady (if boring) dividend payers, have seen their business changed radically by deregulation and competition. Real estate investment trusts have gained increasing interest in recent years as income stocks paying healthy dividends while also gaining in value. Another down side: the dividends paid by stocks are taxable as regular income, which means a much higher rate (for affluent investors) than that applied to capital gains.



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