| Income corporations |
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Imagine that a company provides natural gas for heating and cooking to homes on a populated island through a network of pipes laid under the island's streets. The company is in an interesting situation. On the down side, it doesn't have opportunities to grow. On the upside, it doesn't have much competition. For a would-be competitor to tear up all the streets on the island to lay gas pipes next to the company's existing ones would be nuts. So, what's the company to do with the profits it consistently earns? The decision most of these companies make is to pay out a significant percentage of their profits to their shareholders who are, after all, the owners of the company. These payouts to shareholders are known as dividends. Holders of these corporations' stocks go to their mailboxes four times each year (the number of times dividends are paid) and retrieve checks that represent significant income!
To determine whether a corporation is paying a substantial dividend, just divide the annual dividend the corporation pays by the price of a share of its stock. For example, if XYZ Corporation is paying $2 in dividends per year and its share price is $50, 2/50 * 100 (to make it into a percentage) equals 4%. This is called the corporation's dividend yield.
Suitable for Retirees, those who need their invested money to earn (and pay them in cash) as much as possible. Because income corporations are well-established in their industries, they have a low chance of suffering major drops in their share prices, something retirees can ill afford. Examples Utility corporations National Grid (NGG) and Southern Company (SO). In the news MSFT Named 'Top Dividend Stock of the Nasdaq 100' at Dividend Channel With 3.0% Yield - November 4, 2011 Connections An income corporation is the opposite of a growth corporation. Explorations While doing research you may come across a corporation whose dividend yield is very high, perhaps 15%, 20% or more. It seems like you've discovered an amazing investment. However, you may be about to step into a trap. The reason is that informed investors may be selling their shares, driving the price down. The share price is the denominator of the dividend yield equation, so when it goes down, the yield goes up. Why would anyone sell the shares of a corporation that is paying such a relatively high dividend? They may know that because the corporation is doing poorly, perhaps even losing money, it will have to cut the amount of the dividend, perhaps dramatically. The incredible dividend yield can disappear overnight. A great exercise is to find corporations whose dividend yields are very high (15% or more). Do an Internet search on "income stocks" and you will find links to many penny stocks. Click on them, read news about them, and try to figure out why their yields are so darn high! Canadian Master Limited Partnerships (MLPs) and Royalty Trusts are notorious for their high dividend yields. How are they different from ordinary American corporations? A final word A corporation doesn't have fit the classic definition of an income stock (ie: be well protected in its industry with few growth prospects) to have a high dividend yield. For example, from 2009 through the present, both AT&T (T) and Verizon (VZ) have dividend yields in excess of 5% per year! |