One of the ways that you can help increase your income is through income investing. This type of investing focuses on creating income stream through investments. While you can use bonds to accomplish your income investing goals, you can also use dividends to create an income stream.

What are Dividends?

Some companies pay out dividends as a way to reward shareholders for their investments. Dividends are actually a portion of company profits. This is money that is paid out to shareholders on a regular basis (monthly, quarterly, annually) based on how many shares are held. It is money that is received without reference to buying or selling stock, and is separate from earnings you receive when you sell company stock.

Dividends can be quite useful, since you receive regular income, while engaging in some growth or capital preservation (depending on your goals). If you are interested in creating an income stream, you can invest in companies that pay dividends. Many companies offer dividend payments, and you can find lists of them online.

Choosing Dividend Paying Stocks

Dividends are set at regular intervals, and often expressed as a percentage, such as 2% or 6%. Companies can change the dividend pay out, as many companies did during the recession, cutting the amount that was paid out in dividends. When choosing dividend paying stocks, it is important to consider factors that might affect the pay out. Some of these include:

  • Management
  • Profitability
  • Economic climate
  • Situation of the capital market
  • Restrictions from lenders
  • Liquidity

When evaluating a company for its fitness as an income investment due to dividends, consider the stability of the company, and the likelihood that dividends will remain relatively stable. If the company seems to have a very liberal policy right now, paying high dividends, you might be cautious, since the company may not be able to retain such a generous program. If you plan to rely heavily on dividends for your income investing, you want to make sure that you choose companies that are relatively stable.

As with any investment, it is important to consider diversity. If you are building an income portfolio, consider the types of dividend paying companies you invest in, and consider making sure they are spread across asset classes and industries. And don’t forget to consider other income investments in your portfolio, such as bonds, CDs and other possibilities.

Author

Miranda is a Freelance writer focusing on banking and personal finance.