Investment Income Provides Security

Given the current state of the economy, the sudden and drastic decline in the financial markets, coupled with the drop in consumer demand, it’s hard to discuss income from stocks without eliciting some kind of apprehension or concern. We’ve seen this happen before. There was the stock market crash of 1929, followed by the Great Depression, another stock market disaster in 1987 and our most recent situation that finds the world’s economy in a slumber. However, in every instance the markets recovered and experienced growth spurts that erased those losses. It’s the investors that stay committed to the cause and maintain focus that win the day. That’s why income from stocks is still an essential aspect of any investment portfolio. Stocks provided consistent returns and are a safety net against other investment failures. Diversification is key to success. So, for anyone interested in stocks, what kind of income do they generate and what are the different types of stocks available for purchase?

Common stocks
Even the casual investor is familiar with common stock. Essentially, owning common stock in a company is like owning a part of the company. With it comes the right to claim quarterly and annual dividends. These dividends are based on quarterly profit declarations and are paid out to all common stock shareholders. While the dividends aren’t guaranteed, they are still a solid source of quarterly returns for investors. Sometimes those dividends are high, while other times they are low. With common stocks comes the opportunity to vote on company wide decisions concerning investment, electing board members of the company and other major decisions. A common rule of thumb is one vote per share owned. When it comes to discussing stocks, most people are referring to common shares.

Preferred stock
Preferred shares are similar to common shares and involve some aspect of ownership. However, in the case of preferred stock, owners don’t typically have the same level of power in terms of their voting ability. In fact, most preferred stock doesn’t allow any rights when it comes to voting on key company wide issues. The benefit of preferred stock is that it provides a guaranteed dividend for the duration the stock is held. However, this dividend is typically much smaller than common share dividends. In this case, preferred shares provide investors with consistent income. Another added benefit is that if the company becomes insolvent, it’s the preferred shareholders that are reimbursed before common share holders.

When considering investing in stocks make sure to match your risk level with the type of stock purchased. Do your research and due diligence. Be sure to understand what you are getting into and never purchase stock in a company you’re not entirely comfortable with. Most importantly, stay committed and try to ignore those temporary market downturns. Over time, the return is worth the investment.