Income investing is quickly becoming one of the easiest and straight forward methods that companies use to pick stocks so that a steady stream of stable income can be created. Most of the time when investors consider options for steady income fixed income securities like bonds come to mind, however, if stocks are chosen that pay out a solid dividend then the stock market can also become an easy way to create a steady income. Of course, the trick is identifying the types of stocks that offer a steady income.
For the most part, income investors focus their efforts on established firms that have a lengthy past that have obtained success at a level in which they will not grow or expand any farther. This is due to the fact that these companies do not reinvest their earnings into the company for further expansion, but instead pay out their earnings as dividends so that shareholders always receive a return. This happens most often in industries that are no longer expanding such as utility companies and other companies that have already proved they are capable of producing a steady dividend.
However, there is much more to income investing than simply choosing to invest in companies that pay out high dividends, because the most important component to consider to determine if they are a stable source of income is the dividend yield. This can be calculated taking the annual dividend yield and dividing it by its share by price. Once you complete this calculation you will see the actual return that the stock owner receives. After you determine the average dividend yield of the company you can then determine the yield that you will receive as a stockholder which in the end is the most important figure to have at your disposal.
Outside of this factor, you also will need to look at the dividend yield alongside the past dividend policy of the company. This can help an income investor determine if the company they are looking at will continue to produce the same amount of dividends. It is very important to ascertain if the company will be able to continue to produce high shares or start to slowly decrease since once you purchase your sticks you can lose money if you are not carefully. A talented income investor that is properly educated will continue to check the dividend yield against the past dividend policy in order to continually guarantee that their investment is sound.
One sure sign that a company may be about to fall in dividends is if they have increased their dividend since a large increase may not be sustainable long term and may be a sign of over-optimism. By carefully analyzing the decision of the company and its investment patterns you can make a safe decision that takes into account if your investment is still safe and solid. Of course, before you worry about how safe your investment is, you first need to find a top dividend stock which is where careful research comes into play.