This is an excerpt from the Liberated Stock Trader Book and accompanying training course. Chapter 5 – Growth vs. Value vs. Income Investing
What is Income Investing?
Income investing is a strategy used by investors to generate a stable income from their investments by harvesting the dividends paid by companies. Of the 7000+ stocks currently available to purchase on the major U.S. indexes, circa 2800 companies currently offer a dividend payout.
A dividend is an offer from the company, confirmed by the board of directors, to pay out a portion of its income (after-tax profits) to its shareholders. These companies tend to be well established with a stable income stream, enabling them to offer a constant & consistent dividend.
The dividend is essentially a reward to the shareholder for holding the stock.
What Types of Dividends Are There?
Regular Cash dividend is the most common type of dividend payment, usually released quarterly.
The extra dividend is a special dividend, usually a large one-off payment to shareholders.
Liquidating dividends are usually paid if there are any left-over or allocated funds during the company’s liquidation.
Preferred Dividends are paid out to preferred shareholders with preferential rates or privileges.
The Dividend Trap
When investing for a regular income, it is essential to ensure the company’s stock price is stable and not in a long-term price decline. If you generate a 3% dividend per year from your investment in a company, but the company’s share price is declining by 10% per year, you will be making a net loss of 7% per year. So, even though the income investor is seeking returns from dividends, it is imperative that the stock price is trending in the right direction also.
Other Chapters of the Liberated Stock Trader Book are listed below
Chapter 1 – Essential Stock Market Knowledge – Fundamentals
This chapter sets the stage for the two key areas of stock market technical analysis and the fundamental analysis of companies including macro and microeconomics
Chapter 2 – What Really Moves Markets - Why do Booms and Busts Occur?
This chapter looks at what REALLY makes the markets move, what causes boom and bust cycles, and how to spot them.
Chapter 3 – How do markets move ? - Stock Market Cycles – Business & Economic Cycles – Kondratieff to Kuznets
What are stock market cycles and the cycles of business and economies? Important information that you need to appreciate as part of your core analysis.
Chapter 4 – Is the Company in great shape – P/E Ratio
Next we move into fundamental analysis and the financial fitness of a company. All the major indicators and measures are covered.
Chapter 5 – How to find the best stocks
Stock screening means using criteria to shortlist the kind of stock that you want to purchase. A vital part of any stock market training
Chapter 6 – Chart Reading made easy - Japanese Candlesticks – Bullish Reversal Patterns
Once you know the business climate, the state of the economy and you have shortlisted the stocks you want to buy. The next thing to do is the technical analysis. Even if the company looks great on paper, if the stock price is plummeting you do not want to buy it until it has bottomed out. This is called catching a falling knife. This is what chart patterns and technical analysis help with.
Chapter 7 – Trend Lines and Price Patterns - How to draw trend lines
Here we get into the art of drawing on charts to help you visualize the Supply and Demand on the stock, the direction of the trend, and estimate how long the trend will last. Vital for you to establish buy and sell signals.
Chapter 8 – Chart Indicators are your friends! – ROC Rate of Change Indicator
Which indicators should you use, there are literally hundreds of stock chart indicators? Each has a specific use case and application, which should you use?
Chapter 9 – Chart Indicators Volume - The Price Volume Relationship
Volume is a vital indicator along with the price. Both of these you need to understand in granular detail, you will learn everything you need to know.
Chapter 10 - Advanced Stock Charting Techniques Parabolic SAR
Moving to advanced technical analysis we cover indicators such as parabolic SAR and point & figure charts.
Chapter 11 - Sentiment Indicators & Trading the News - How to trade the news
How are the market participants feeling? Positive, Negative, or indifferent. Consider that 90% of people fail to beat the average market returns, sentiment indicators can be a great contrary indicator. Learn how to use them to your advantage.
Chapter 12 - Trading Strategy - What type Of Investor are you?
Understanding how you want to invest, how much time you have, and your time horizon. These questions all help you to understand what type of investor you want to be, this then enables you to select the right strategy for you. Then we move on to building your stock investing system, a critical element to your plan.
Great article! Stock screening/picking is a crucial step, that will determine the return of your portfolio.