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.

Undervalued cheap stocks are a very good way for a sharp investor to make a return on their investment. The definition of an undervalued stock is one that is trading below it’s intrinsic market value. Stocks bought at a low price are then sold as futures for a higher price.

Search
When searching for undervalued stocks, an investor hopes that the market will eventually identify the correct value of the stock and realize it’s full market value. Finding this type of stock requires an investor to stay in touch with market trends, be in tune with market cycles, and be able to act with a matter of determination.
An astute investor knows that to find good deals requires familiarity with companies they have an interest in. Researching a company’s financial history, as well as any debts they may have, will give a realistic view of the services and products they offer. Their record of earning and profit over the years will give an excellent indication if the numbers are on the way up, as well as barriers that might prevent any competition from getting an immediate foothold in their market. This coupled with the fact that they may have a service or component that might benefit in a new technology or marketplace will give distinct clues as to their real worth. A sharp investor will see these clues before the general marketplace does.

Evaluation
No less an authority than stock guru Warren Buffett has said that “the value of a business is the sum of the cash flows over the life of the business discounted at an appropriate interest rate.” Simply put, this means that an investor wouldn’t be able to predict a certain stock is undervalued unless their homework is done to make sure it has a good chance of future profits and interest rates to match. It is imperative that when researching the market an investor is somewhat certain that a company has what it takes for a future profit. This will help determine if it is an undervalued stock candidate.

P/E
High growth stocks may have a high P/E ratio because they are expected to grow rapidly over the next few years. Look for P/E ratios that are less than the market average for a high growth company to find a winning stock.

If you practice the art of buying undervalued cheap stocks in a wise manner then you will be as safe as you can be in the ever changing world of stock investing.

Generally, the least speculative stocks offer dividends as incentives to the shareholders to continue to maintain their interests in those companies. Since speculative stocks already offer the sort of massive growth that many aggressive traders seek, those companies do not need to offer dividends to entice people to buy shares; companies that exhibit slow and stable growth, however, are wise to reward their loyal, more serious investors with the dividends.

HOW BANK STOCKS PAY DIVIDENDS:

While recent troubling events in the American economy have generated negative feelings towards banks and mortgage lenders, banks are generally the safest companies in which to invest. The banks make their money primarily from the interest they collect on loans, such as mortgages, to a broad range of customers. Credit card loans and personal loans also provide the banks with the funds they need to grow business and produce healthy dividends for shareholders. A few years ago, some banks faced the grim repercussions of giving out extensive sub prime loans: speculative loans to customers with a high risk of defaulting. Despite the greediness of some banking officials who approved those sub prime loans, many leaders of other upstanding banking firms were not beguiled by the “housing bubble”, as it was called. Some banks have maintained a dividend for their investors for years, giving out intelligent loans and continuing to create a profitable income stream.

DIVIDENDS THEN AND NOW:

Although bank stocks pay dividends, tough economic times will drive dividend rates down. When too few people are taking loans from banks, the banking business suffers and offering a healthy dividend becomes difficult for even the most solvent firm. Today, some bank stocks that sported a 3% dividend yield five years ago now have a 1% yield.

CONCLUSION

The American economy is resilient. As employment increases, more financially solvent people will be looking to take out loans from banks. With a new influx of funds, these banks will have to raise their dividends to stay competitive, and the average dividend yield will most likely match the healthy yield of five years ago.

Whole Foods Market (WFMI) is a specialty grocery chain catering to affluent customers who want organic and healthy foods. The chain has 284 stores. The majority of them are in located throughout the U.S., however, it also has a few locations elsewhere. Whole Foods recently bought out its arch rival, Wild Oats, in a calculated move. This makes Whole Foods the most sizable global retailer of organic foods with no close competitors. Other retailers, such as the behemoth Wal-Mart (WMT), are expanding their offerings of natural and organic products in response to consumer demands. It has yet to be seen if this has affected Whole Food’s Business.

This particular stock has been very volatile over the past year, from a low of around $17 to a high of around $43. The stock appears to be on an upswing. The price has recovered with the overall market and sales and earnings are both up relative to a year ago.

John Mackey, CEO, stated in the most recent quarterly earnings report that the business has come out of the recession with a better balance sheet as well as a more disciplined approach to capital spending. Newly-opened Whole Foods stores are performing well. The company is trying to increase its per square foot. As the economy improves and customers have more disposable income to spend, Whole Foods should benefit too.

Unfortunately for all of us dividend investors, Whole foods cut their dividend in 2008.