Ben Todd | Jun 2, 2017 | 1
How You Should Be Investing In Income Shares If You Want To Earn More Money
People buy income shares so they may be paid money via dividends. Very rich people are able to live from dividends alone whilst keeping the bulk of their money locked away safely in shares. Income shares are not usually very big growers.
If you are looking to invest in shares that will grow, then check out this article about growth shares How You Should Be Investing In Growth Shares If You Want To Build Wealth
Income share prices may rise over time so you may sell them for a profit, but most people buy them for the income they produce.
Retired people like to turn their portfolio into an income-based portfolio because they are not looking to grow and sell their shares–they would rather have money paid to them from their shares.
Conservative and novice investors like income-based shares because they can get and keep their earnings. For example, if you had a set of income shares for five years and the company went bust, you wouldn’t lose everything because you would have had five years of dividends.
How Many Times Are Dividends Paid?
If you are looking to buy income-shares, then you may see annual dividend amounts. These are an indication of what you may get in a year if you were to buy the shares. Many companies pay their shares twice per year. The amounts each company gives out as dividends (payments) varies from company to company.
There are no guarantees when it comes to income shares. Just because they paid a certain amount the year before doesn’t mean it will happen again. The coming year may see them discontinue their dividends payments, or it may see the dividend payments rise or fall.
The Pros And Cons Of Income Shares
It sounds a little too good to be true doesn’t it? They are shares that you can keep and sell in a few years for profit, and they pay you twice per year just for having them.
- Far less volatile than many other types of shares
- Often considered to be defensive shares
- More likely to survive a depression
- Higher paying shares come from larger dependable companies
- There are quite a few companies that issue them
- Dividend amounts may go down or stop at some point
- Dividends have an interest-rate sensitivity
- Inflation eats into dividends
- You have to pay tax on your income
Is It Smarter To Invest In Bonds?
It depends on your situation. For example, if you are looking to lock your money away so it can grow safely, then it is a good idea. If you are retired, then bonds are not such a great idea as your primary investment method. Here is an example showing how income shares may be better than bonds.
Let’s say you have $1500 in income shares in your portfolio.
At around a 6.7% return, you can expect $100 per year of dividend income.
You could put that $1500 into a 5-year bond at 6.7%.
At the end of the 5yr period, you would have the same amount of money from both.
However, that only applies if inflation stayed at zero for five years (which is probably won’t). Assuming there is inflation, you would get more from the shares than you would from a bond. On the flip side, if the company issuing the dividends lowered the amount they paid out, then you would have been better off with a bond.
Picking Shares To Earn An Income
Which shares do you pick?
There are a lot of income shares you can choose from, but which are the best value? Common sense suggests you go for the shares that pay the most in terms of dividends each year with the smallest amount of initial investment.
Let’s say you buy a single share at $20, and every year it gives you a total of $1 in dividends. That is a 5% yield because $1 is 5% of your initial $20.
Here Is The Only Confusing Part
The yield percentage, i.e. the money you get in the dividend as income, will change from time to time. The amount you receive is still the same, but the noted percentage on websites will change.
It changes because the share price changes from time to time. For example, if you buy one share at $20, and it gives you a total of $1 in income for a year, then that is 5%.
However, the price of the shares may go down sharply one day to $10. However, you will still (most likely) get a dollar of income for that share, but the yield percentage will show as 10% and not 5%. A higher yield percentage may make it look like you are going to get more money for your investment–but you probably won’t.
How Much You Pay For Your Shares Determines How Valuable They Are
Do not misunderstand that header. There are many factors that determine if stock is good or bad. However, if you are looking to make an income from shares by picking ones that pay dividends, then the price you pay per share is a big factor to consider.
You need to ensure the yield is sufficiently high. For example, if you could put your money in a savings bond and earn the same amount as you could with dividends, then why bother investing in shares and risking the share price going down and you losing money?
If investing $1000 in Piggies gives you $40, and investing $1000 in CatMan gives you $38, then putting your money into Piggies may be a better idea assuming Piggies is not a company going bust.
How Do I Know If A Company Is Going Bust?
You cannot be sure that the company you invest your money in is going to last a long time and/or keep its share price at the same level. However, the amount they pay in dividends is very telling.
Accountants can fudge the numbers, and company directors can talk a big game, but you can’t fake dividends. If you are paying out dividends that you cannot afford, there is a very limited time you can do it for. If a company is paying dividends every year, then each year they become more and more credible and seemingly more safe. Use dividends as an indicator of a successful business that you may safely invest in.