Income Stock: Meaning, Characteristics, Advantages, Criticisms, and More

Income Stock: Meaning

Income Stock is a type of equity security that provides regular dividends to the shareholders of the company. Moreover, these are stocks that provide investors with a steady income source and less risk appetite. The dividend of the company gets adjusted according to the inflation rate. And these dividends continuously increase over time. The frequency of dividend release can vary from monthly, quarterly, or yearly, depending on the comfort and decision of the company. Income Stocks are less volatile in nature in comparison to other stocks.

In comparison to other stocks, Income Stocks generate a high dividend yield for the shareholders by releasing regular dividends. The formula for calculating dividend yield is as follows:-

Dividend Yield = Annual Dividend Per Share / Stock Price Per Share * 100

Income Stocks are prevailing in almost all sectors of the economy, but they are seen majorly in sectors like Real Estate, Gas, Electricity, Energy, etc. Moreover, the reason for this is that the issuance of these stocks takes place generally by defensive companies. These companies are productive for almost a whole year with continuous sales. As a result, they are able to provide regular dividends.

The other name of Income Stock is Dividend Stocks or Income Investments.  

Characteristics of Income Stock

They have many characteristics, which are as follows:-

Regular and Consistent Dividend Payments

Income Stocks provide shareholders with regular dividends every year. This dividend is adjusted every year according to the inflation rate. As a result of this, the dividend of the company increases every year, thereby boosting investors’ confidence.

Less Risky

These stocks are less risky in comparison to other stocks. They are less volatile and release regular dividends.

Lower Growth Potential

Compared to growth stocks, income stocks generally have lower growth potential. Instead of reinvesting all their profits into expanding the business, income stocks focus on distributing a portion of the profits to shareholders as dividends. This conservative approach aims to provide stable income rather than aggressive growth.

High Switching Rate

Investors of Income Stocks are very sensitive to the returns from their investments. That is to say, if these investors are getting better returns in some other fixed-income security, they easily switch to that investment. That means there remains no longer-term stability or longer-term commitment from the investors under Income Stock.

Defensive in Nature

Income stocks are considered defensive investments because they tend to be more resilient during market downturns. The reliable income stream they provide can help cushion the impact of volatile market conditions and provide a degree of stability to investors’ portfolios.

Lower Volatility

Income stocks typically exhibit lower price volatility compared to high-growth stocks. Their stable cash flows, strong balance sheets, and consistent dividend payments make them less susceptible to extreme price swings, attracting risk-averse investors.

Less Capital Investment

One of the very important characteristics of Income Stocks is that these companies do not reinvest their profits. Instead, maximum profits are distributed to the shareholders in the form of dividend payments. Thereby they are left with little funds to make further capital investments. As they distribute a major chunk of their profits in the form of dividends, there is lesser capital investment.

These characteristics are non-exhaustive in nature.

Advantages of Income Stock

  • It provides shareholders with regular and increasing dividends, which gives them a high and regular dividend yield.
  • Income Stocks, in comparison to other stocks, are less volatile. This makes it less risky.
  • Income Stock suits best the low-risk appetite individuals like old age people, non-salaried people, students, etc., who look for regular income flow.
  • These Stocks beat the inflation rate and thereby provides a continuous increase in dividends over the years.
  • All those companies, which issue these stocks, are mostly in a good financial situation. They have stable profits and are considered a good companies. The issuance of these stocks shows a positive picture of the company.
  • Companies issuing Income Stocks have mostly large market capitalization. This acts as a positive sign for the investors.
  • Releasing regular dividends at an increasing pace boosts the goodwill of the company.
  • As these stocks attract a lot of investors, the market capitalization of the company gets boosted.

These advantages are non-exhaustive in nature.

Income Stock

Criticisms of Income Stock

There are many advantages of Income Stocks, but there are also a few criticisms, which are as follows:-

  1. One of the biggest criticisms of Income Stock is that it avoids the long-term growth of the company. Above all, it does not allow the company to plow back its profits in the company for growth and expansion purposes. Instead, the company has to give away most of its profits in the form of dividends.
  2. The second criticism is that the shareholders of the Income Stocks mostly are not concerned with the long-term growth of the company. However, they are like debt holders, who are only concerned with their regular dividends, and they can back off if there are no returns.
  3. The third limitation of Income Stock is that they are very expensive in comparison to other stocks. However, if the investors have very little capital investment, there is no point in even thinking about these stocks.
  4. The fourth criticism is that dividend income is taxable in nature, which makes it a little unattractive.

Most importantly, these criticisms are non-exhaustive in nature.

Difference between Income Stock and Growth Stock

These two types of stocks are completely opposite to each other. Their differences are as follows:-

Income StockGrowth Stock
These stocks release regular dividends, thereby giving high dividend yields.These stocks do not release regular dividends, and so give low dividend yields.
The main focus of these stocks is to ensure that the shareholders get regular dividends.The main focus of these stocks is to put the funds to best use, and thereby shareholders to have a capital appreciation by increasing the share price of the company.
These stocks are comparatively less risky.Growth Stocks are comparatively riskier.
Income Stocks are generally defensive in nature.Growth Stocks are generally aggressive in nature.
These stocks are comparatively less volatile in nature.Growth Stocks are comparatively more volatile in nature.
Shareholders of these stocks have a higher switching ratio. They easily shift to other securities for better returns.Shareholders of Growth Stocks have a really low switching rate. They are generally long-term investors looking for growth of the company over time.
Investing in these stocks is expensive, as the stock prices are generally high.Investing in these stocks is slightly less expensive.
In the case of Income Stocks, it is not possible to invest with lower capital investments.An individual can invest in growth stocks with lower capital investments as well.
These shareholders prefer getting dividends.These shareholders prefer not to get dividends. To get better long-term price appreciation, they want their dividends to be plowed back into the company.
Mostly well-established or blue-chip companies issue Income Stocks.Both well-established and small companies can issue Growth Stocks.
These stocks yield less return with respect to their price in comparison to growth stocks.Growth Stocks yield a higher return in comparison to Income Stocks.

Certainly, these differences are non-exhaustive in nature.


In short, income stocks have their own advantages and limitations. Irrespective of all their limitations, they are the most preferred stocks. Companies who want to create goodwill and positive sentiments in the market prefer issuing this stock. On the other hand, investors preferring steady and regular dividend income with less risk and volatility go for these stocks. These stocks can give above-market returns if the selection of the company is favorable.

Sanjay Borad

Sanjay Bulaki Borad

MBA-Finance, CMA, CS, Insolvency Professional, B'Com

Sanjay Borad, Founder of eFinanceManagement, is a Management Consultant with 7 years of MNC experience and 11 years in Consultancy. He caters to clients with turnovers from 200 Million to 12,000 Million, including listed entities, and has vast industry experience in over 20 sectors. Additionally, he serves as a visiting faculty for Finance and Costing in MBA Colleges and CA, CMA Coaching Classes.

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