Investing in stocks for income.

• Author: Green, Robert

In today's low interest rate environment, income-oriented investors are being forced to look beyond Certifications of Deposit and bonds. One excellent source of income that should not be overlooked is common stocks.

At first glance, this may seem like a strange suggestion. Most consider stocks to be speculative investments that are best suited for achieving growth and capital gains. What they may not be aware of, however, is that many stocks pay large cash returns, or dividends. These dividends are not only competitive with current interest rates, but they often increase annually, something no C.D. or bond ever does. In fact, a portfolio of dividend-paying stocks can provide investors with increasing income -- a valuable inflation hedge.

Let's take a look at how this works. In the early years of most corporations, all earnings are needed to finance the growth of the company. As their growth slows, many companies find that they produce more earnings than can be reinvested in the business. The excess earnings are paid out in cash to the shareholders in the form of dividends. Each shareholder will be paid a specified dividend. The more shares an investor has, the larger the amount of dividends he or she will receive.

Every three months, the board of directors meets to decide if a dividend will be "declared" for the upcoming quarter, and how much the dividend will be. Once a company starts paying a dividend, the directors will be very reluctant to reduce or eliminate it, as they know shareholders are relying on it as income.

As time passes, it is natural for growth to continue to slow, further reducing the need for retaining earnings in the corporation. This will provide growing amounts of cash for increasing the dividend. The more mature a company, the more likely it will pay a large dividend. Risk of a cut in the dividend will come during adverse economic conditions, i.e., a recession or when the company reaches a prolonged period of decline.

What should the income-oriented investor look for in dividend-paying stocks? The first key attribute is a long, uninterrupted history of profitability and dividend payment.

When searching for companies that always seem to produce profits and have paid dividends, you will quickly discover that some industry groups will have many companies that qualify. Other industries will have none.

Foremost among the great dividend-paying industries are utilities. This only makes sense, as utilities...