Income stocks are appealing simply because of the dividends they pay.
These issues have a long history of regularly paying higher than average dividends.
Income stocks are ideal for those who seek a relatively safe and high level of current income from their investment capital.
Growing dividends protect from effects of Inflation
Holders of income stocks (unlike bonds and preferred stocks) can expect the dividends they receive to increase regularly over time.
Thus, a company that paid, say, $1.00 a share in dividends in 1997 would be paying just over $1.80 a share in 2012, if dividends had been growing at around 4% per year.
Dividends that grow over time provide investors with some protection from the effects of inflation.
Major Disadvantage: some have Limited Growth Potential
The major disadvantage of income stocks is that some of them may be paying high dividends because of limited growth potential.
Indeed, it is not unusual for income securities to exhibit relatively low earnings growth.
This does not mean that such firms are unprofitable or lack future prospects.
Quite the contrary: Most firms whose share qualify as income stocks are highly profitable organizations with excellent prospects.
A number of income stocks are among the giants of U.S. industry, and many are also classified as quality blue chips.
Many public utilities are in this group, such as:
- American Electric Power,
- Duke Energy,
- DTE Energy, and
- Southern Company.
- Conagra Foods,
- General Mills, and
- Altria Group.