Best Growth Stock Editorial »

Equity income investors buy stocks that pay dividends; fixed income investors buy bonds, CDs, mortgages, and other fixed-income vehicles. The point is, both types of investors are seeking income, but since this is an article about investing is stocks, we will focus only on the equity income investor here.

 The greatest advantage of income investing, of course, is the income, and income stocks are, in general, usually fairly safe. Your annual return should be at least equal to the stock’s annual dividend, and an increase in stock price, if any, will be a bonus. So if the dividend is 3 percent, you’ll make at least 3 percent a year on the stock. If the stock price rises, you’ll get that return as well. If the stock price falls, the dividend as a percentage of stock prices rises, you’ll get that return as well. If the stock price rises, you’ll get that return as well. If the stock price falls, the dividend will stay the same, at least in the short run, so your dividend as a percentage of stock prices will actually increase.

For example, if you buy a $25 stock that pays an annual dividend of $1 per share, you would make 4 percent on your investment. If the stock price falls to $10 and the dividend remains $1 per share, your dividend would be 10 percent instead of 4 percent, but you would have suffered a 60 percent loss on your holdings. New purchasers of the stock might be excited by the 10 percent dividend, but they would have to be concerned that the dividend may not continue because the companies do cut dividends. Either the stock price will recover and the dividend percentage will return to a more normal level, or the company could decide that things are so bad they have to cut the dividend.