Income Stock

  

Categories: Stocks

There are two basic ways to make money investing in stocks. One is capital appreciation....good ol’ buy low, sell high. It’s the stereotypical stock market action, with traders guzzling Red Bull and frantically working their stress balls.

The other way to make money comes from dividends. Those are payments companies make to their shareholders.

Money from the capital appreciation comes from your stocks increasing in value. You sell the shares for more cash than you paid to buy them, allowing you to keep the profit.

Income stocks represent those aimed more at accumulating dividends. You don’t really care if the share price goes up. You’re just in them for the quarterly dividend checks sent from the company.

As such, when seeking out income stocks, investors look for high dividend rates and low volatility. The shares often come from old-line companies with steady income and predictable businesses. Utilities represent the stereotypical type of company that has income stocks.

Related or Semi-related Video

Finance: What is the Math of Dividend Re...2 Views

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and finance Allah shmoop What is the math of dividend

00:06

reinvestment All right people While some stocks pay dividends you

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know a bit of cash and investors get for holding

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the stock It's little incentive Teo you know keep holding

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onto the shares You could take that cash into whatever

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you want with it but you can also reinvest it

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which means buying mawr of the stock you already own

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So the concept may seem boring but it's good way

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to increase your stock holdings And it's like your shares

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or having little baby shares all without you putting MOHR

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of your own money into the process We'LL stock prices

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move around a lot and as such the math behind

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dividend reinvestment can get complex ish or well sometimes just

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plain ugly So let's do a problem here You buy

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thousand shares of Alpaca Corp and Alternative milk provider right

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They provide milk from alpacas of course but also lamas

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goats and yaks Well here's the stock performance over the

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two years or eight quarters that you held the stock

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A quarter is a three month period by the way

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At the end of the first quarter the stock was

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at one o two fifty then at the end of

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Que Tu shares have risen a one o five and

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stock kept going up in Q three reaching one of

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seven five by the end of period Still climbing in

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queue for alpaca reached one ten by the end of

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that year Right next year Same basic story of stock

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reach one twenty share after the end of the second

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year and that's its performance The stock continue to pay

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its fifty cent per share each quarter in Dividend Doe

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It held the dividend steady for the full two years

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so each quarter the company's sends you cash of fifty

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cents per share for each of your thousand shares are

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five hundred bucks each quarter You can choose to reinvest

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that dividend each quarter The amount of stock that those

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dividend repurchase sings by with that five hundred box Well

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it depends on the stock price of time Right when

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you got the first dividend payment while shares were at

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one o two fifty five hundred divided by one or

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two fifty share and that's about four point eight shares

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So after this dividend reinvestment you have one thousand four

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point eight ish shares And yes you can have point

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eight of a share or something That's how the world

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works OK under the second quarter you get another fifty

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cent dividend per share in the stocks out one o

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five Well remember you no longer have a thousand shares

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You have a thousand four point eight shares because of

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that dividend reinvestment thing in the first quarter So this

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time around you get five hundred two dollars forty ish

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sense in dividends Reinvest those dividends and while you get

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another approximately four point eight shares something like that may

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be a little more The process continues As long as

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you keep the dividend reinvestment going you buy shares with

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the dividends giving you Mohr shares which then increases your

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dividend which gives you more money to buy more shares

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Well the main complicating factor in this calculation is that

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the price of the stock keeps moving It makes it

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difficult to have a clear formula for how many shares

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you get for some set amount of dividend payment right

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You have to just do the math a quarter at

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a time So what's the advantage to all this But

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why reinvest instead of just taking cash simplifying our example

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of it You're getting about five shares a quarter for

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eight quarters in reinvesting your dividends So at the end

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of two years you have forty more shares of alpaca

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instead of having kept the cash dividend on your own

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But say you just kept the cash well on a

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thousand shares at fifty cents a share each quarter over

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eight quarters That's four grand Also you still have the

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thousand shares of stock that you owned originally now worth

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one hundred twenty bucks each or one hundred twenty grand

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Add in the four in dividends and you've got one

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hundred twenty four grand See how that works That's the

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map But here with dividend reinvestment and ignoring all kinds

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of taxes and commissions and other you know realistic noise

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well you'd have a thousand forty shares at one hundred

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twenty dollars each for a total value of one hundred

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twenty four thousand eight hundred bucks and change You'd have

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made another eight hundred ish dollars by reinvesting your dividend

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and this presumes that you spent all of the cash

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dividends out to you when you didn't buy back shares

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Ravan reinvesting that cash somewhere you know useful So why

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does all this matter Well the S and P five

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hundred pays about a two percent dividend in the modern

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era Maybe three That is The median company pays about

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that amount The SNP is Justin Index It rolls up

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each of those five hundred companies into a single tracking

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device Some pay a lot Maurin Dividend wanting some pay

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a lot less some pain Nothing Hi Google Hi Amazon

04:08

Hi Facebook We're looking at you non dividend payers anyway

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Since markets go up over time dividend reinvestment has made

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relative returns better for those buying Mohr shares with their

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dividends However it usually takes a long time for those

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differences to really show up in total value or returns

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And all of this is dependent on stock's going up

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which doesn't always happen tends to happen in the long

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run But in short first well who knows also tends

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to work on an average here Yes and P five

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hundred tends to trend upward over the long haul meaning

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that out of five hundred major companies you can expect

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the median one to show stock gains of about eight

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nine ten percent year over time But in that group

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while some stocks go down some go away Well if

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you're a dividend reinvesting in one stock you return then

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depends on what that one stock did Alpaca is going

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up now because fru fru types like to stock their

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fridges with yak milk But what if Yu Lan musk

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develops a cheap lab created chemical alternative Teo yak milk

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You know the bottom line dropout of alpaca dot com

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And then you might wish you'd taken the cash and

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not reinvested dividends Yakety yak as they say or you 00:05:11.895 --> [endTime] know something like that Ah

Up Next

Finance: What is a Dividend?
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