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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:

·        Preservation of capital is critical.

·        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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