Why Income Investing Is Out of Vogue

Best Growth Stock – An offshoot of income investing is growth-and-income investing. While the pure equity income investor looks for stocks with the largest dividends, the growth-and-income investors looks for growing companies that pay dividends in the stock market and have a history of dividend increases as has happened. In a sense, growth-and-income investors have the best of both worlds, because they get a steadily growing income from the dividend as well as potential price appreciation.

Why Income Investing Is Out of Vogue

In past decades, earnings investing was one of the major styles. But then the time of high tech firms with their incredible returns came along, and management rethought the practice of paying dividends. If you are excellent at making microchips, as an example, and you are growing your company eighteen % or even more a year, why pay out your takings in notes dividends? Why not grow your company by reinvesting the takings in R and D of new and better products? That’s what the number one chip maker Intel did, with most other technology corporations, and this move obviously sped up their expansion. But earnings speculators demanded on stocks that paid dividends, so they did not buy the attractive, high-flying tech stock and hence missed out on their exceptional expansion. Revenue stockholders also started to notice that over time dividend-paying stocks have yielded a standard yearly return of only about 8 to nine p.c, compared with eleven to 12 p.c average return of all stocks. For the reasons stated earnings investing has been confined to a minor investing style.

Role of Interest Rates in Income Investing

One nuance of income investing is the whole issue of interest rates. Income investing carries with it the risk that market interest rates will change. For example, if you bought a stock for, say, $25 with a 4 percent dividend in October 2000, you may have been pretty happy by the fall of 2001 because interest rates had fallen to below 3 percent. In all likelihood, the rice of a stock that paid a 4 percent dividend probably increased as folks sold bonds and CDs to buy good dividend-paying stocks, so you got that price increase as a bonus. But if interest rates were to go back to, say, 10 percent, you wouldn’t be such a happy camper. With higher interest rates, it is almost certain that the price of your 4 percent dividend stock would fall, as investors would expect high-yield stocks to have dividend rates well above 5 percent.

The points, stocks that are bought primarily for their dividend yield carry the added risk that if interest rates go up, the price of the stocks will, in all likelihood, go down. If you’re a long-term holder that really doesn’t matter.