What Are Income Stocks? Definition, Benefits, Risks

Investors who are looking for more ways for their money to work for them might want to explore income stocks or securities that make regular payouts. Income stocks make regular payouts, usually as a distribution of profits called dividends. These dividends can turn into another source of income for investors.

What are income stocks?

Income stocks are securities that make regular payments through dividends. These types of stocks tend to be less volatile and more stable compared to other types of stocks, like growth stocks. Income stocks might appeal to investors who don’t like the instability of some securities.

Dividends can be paid out on a regular basis—monthly, quarterly, or annually, for example. They can then be reinvested back into an investor’s portfolio.

Examples of income stocks

There are quite a few different types of income stocks investors can explore. Among the ones with the highest dividend yield and ongoing dividend payout growth as of May 31, 2022 are:

1. IBM Common Stock.

   IBM on the New York Stock Exchange (NYSE) has an annual dividend yield of about 4.75%.

2. Shell Midstream Partners LP.

   Otherwise known as Shell (SHLX on the NYSE), this dividend stock has an 8.50% dividend yield.  

3. Altria Group Inc.

    This company’s ticker symbol is MO on the NYSE and gives a 6.70% dividend yield.

4. Ares Commercial Real Estate Corp.

   ACRE on the NYSE, this stock has a 8.98% dividend yield.

5. MPLX LP.

   MPLX on the NYSE this one has a 8.67% dividend yield.

Potential benefits and risks of income stocks

Any investment can carry some level of risk, but some are riskier than others. Income stocks have a reputation for being more predictable and can provide a few benefits to investors.

• They’re a form of passive income.

  Income stocks do the work for the investor by paying shareholders a portion of earnings without them having to buy more shares. Simply owning the stock can provide an automatic payout.

• They come with a payout.

  Whether it’s a little bit or a lot, investors are likely to get some sort of pay through income stocks. When this happens, options include taking the cash or reinvesting the earnings back into the portfolio.

• Stable stocks.

  If looking for stability, income stocks aren’t as volatile as some other stocks that don’t pay dividends. They can be a choice for long-term investors or those planning to save for future goals like retirement.

Still, there are downsides of income stocks to keep in mind.

• The yield might be low.

  Not all income stocks offer high dividend yields. For instance, Apple (AAPL) has a 0.62% dividend yield while Microsoft (MSFT) is at 0.92%. 

• It’s not offered on every security.

  Not every stock is a dividend stock. While many public companies offer dividend payouts to their shareholders, not all do. Notably, many technology companies do not offer dividends. Those focused on income stocks may end up with less exposure to industries with historically high growth potential, like technology.

What is the difference between income stocks and growth stocks?

Income stocks and growth stocks have different goals and purposes. It’s important for investors to understand the differences to help determine which fits their financial plans.

Income stocks are sources of income

As its name suggests, income stocks can help create passive income for an investor through regular dividend payouts. Growth stocks, by comparison, typically don’t pay dividends and instead reinvest any earnings back into the company. Amazon and Netflix are examples of growth stocks.

Income stocks have ongoing dividend payouts, with some increasing payouts to shareholders over time. If a company doesn’t perform well, money isn’t taken from the investor, but the payout is smaller. For growth stocks, investors could lose money if a company doesn’t perform as well as projected. 

Growth stocks are riskier

A growth stock is expected to have a lot of future growth, but is considered to be riskier than income stocks. Growth stocks increase in value over time and are expected to meet or exceed the market average in returns. They are expected to have a lot of future growth but are considered riskier compared to income stocks. Growth stocks don’t tend to pay dividends and any extra earnings the company makes go back into the company, not investors. 

Growth stocks tend to meet or beat the average stock market returns, which is approximately 10% a year. This varies based on market returns, so if the market is down, earnings on growth stocks will also be down. This means dividend returns might pay out a higher return depending on the income stock.

What to do before buying income stocks

There are many income stocks to choose from on the public stock exchanges, but it’s important that each investor research to find the ones that are the best fit. If considering buying an income stock, start with these steps:

1. Finding the right stock.

   When considering income stocks, investors may look at average yield, typical payout, and the frequency in which the company raises dividend payouts. Some questions that may help with this research include: What’s the average dividend return? How often are dividend payouts (monthly, quarterly, or annually)? Does the company increase dividend payouts regularly?

2. Figure out how much to invest in income stocks.

   Investors may consider their budget for investing in income stocks and how that investment figures into their entire portfolio. Working with a financial advisor may be helpful in determining the right number or percentage of dividend stocks to hold in the portfolio to reach the right balance for the end goal. Questions an investor might consider asking themselves include: Will this investment in income stocks skew the portfolio in one direction, or will the portfolio be appropriately diversified?

3. Buy the stock.

   Put an order in through the online broker of choice. For investors looking at specific dividend payout amounts, timing is a factor. Investors may look at the record date, which is when an investor needs to be on record for owning shares, as well as the payout date, which is when investors can expect the dividend payout. These dates can influence when investors buy stock.

The bottom line

Rather than trying to time the market and sell high to maximize gains on share price, income stocks can allow investors to get regular dividend payouts, whether monthly, quarterly, or annually. These stocks tend to be less volatile than growth stocks and have the potential to provide consistent, and reliable, passive income to investors.

Those who want a quick or instant win might not benefit from income stocks. These types of investments are a good choice for investors who are looking for long-term, strategic growth.