Online Share Trading: Income Investing is a strategy that attempts to pick assets that pay a steady stream of income. It is a more conservative investment strategy than investing for growth but it can be a very successful one.
Assets that pay an income include bonds and dividend paying stocks. Bonds are a loan. When you buy a bond you are lending someone money that they promise to pay you back with interest. Issuers of bonds include governments, government agencies, local government authorities and corporations who need to raise capital to finance their operations. The bond market is also known as the fixed income market. This is because bonds pay a fixed amount of money to the investor. Bonds can also be purchased through online share trading.
A dividend is a pay out of a portion of company profits to its shareholders. It may be paid on an annual, bi-annual or quarterly basis. The company, however, may or may not choose to pay a dividend. They are not fixed and vary according to the profitability of the company. Preference shares rank above ordinary shares. In the case of insolvency they receive their share capital before ordinary shareholders. Preference shareholders have restricted voting rights but usually receive regular dividends which are predetermined at purchase.
It is easy to find companies that pay a regular dividend because the records are available. Typically, investors buy the shares of large, more established companies in order to receive a dividend. Often utility and financial companies feature highly on the list. Johnson & Johnson, for example, is ranked as one of the safest paying dividend stocks with a record of regular and increasing dividends over a long period of time. Companies in the S&P500 tend to pay a dividend in the region of 2-3% on average. Income investors will often put their money in companies that are paying above average dividends.
Dividend Yield measures what an investor earns in the form of dividends.
From the point of view of income alone, the yield is more relevant than the share price. Let’s take a company whose shares are $20 that pays a dividend of $1, a yield 5%. Another company that is trading at $30 per share pays a dividend of $2, a yield of 6.66%. An investor seeking income may be better to buy the $30 stock even though they receive fewer shares. Of course, the fundamentals of the company need to be good in order that they can continue to pay dividends in the future. Just because one company pays higher yields than another does not mean it is better. That is why investors often focus on solid companies with a strong track record. Investors can also invest in Exchange Traded Funds that seek to provide high yields by investing in a basket of assets that pay high dividends.
One way to massively boost profits over time in online share trading is to reinvest the dividend. Such an approach can turn a conservative investing strategy into an immensely profitable one. Reinvesting the dividend will increase the investor’s share capital. Even if the dividend yield remains the same, the income will still increase. This is the power of compounding and it can have dramatic effect on profits over time. Dividends typically attract taxation as well so an investor should check how this will affect their results.
Income investing is generally
regarded as a conservative investment approach but reinvesting the dividends in
a reputable company over a long period of time can be a very rewarding