Mixing Equity and Income in Your Stock Portfolio

Low interest rates have been a boon for homeowners, but the picture hasn’t been so rosy for income investors. Yet some people have overlooked one income-producing investment category that may also help with other financial objectives, such as reducing portfolio volatility. What is it? Equity-income investments.

Learning the Basics

Long-term investors often purchase equities for their growth potential. Since capital appreciation is the goal, some stock-issuing companies reinvest their earnings in the company. The hope is that as they grow, they’ll capture more market share and the price of their stock will also increase. Essentially, the reward for the investor is delayed, if it occurs at all.

Other companies opt for instant gratification, paying part of their earnings, called dividends, to shareholders. Dividends are issued on a regular basis often quarterly. Many large, well-established companies, such as Coca-Cola and General Electric, have historically issued dividends.1

Why Invest?

There are several reasons to consider adding dividend-paying stocks to your portfolio.

1.     Equity-income investments may provide supplemental income, during retirement, for example. They offer another choice for potential income in addition to bonds and cash equivalent investments. And dividend income may help provide a cushion in your portfolio against stock market volatility.

2.     Dividend-paying stocks have at times outperformed non-dividend paying stocks. The prices of dividend-yielding equities have historically also fluctuated less than non-dividend paying equities. Considering an addition of these income-producing stocks to your portfolio could potentially help smooth the impact of market swings.

3.     A significant number of companies have increased dividends in recent years.1

Tempering Risk

One way to tap the potential of dividend-paying stocks is to invest in an equity-income mutual fund. Professional money managers carefully screen companies, looking for consistent, financially stable dividend payers. Additionally, the fund managers may purchase the stock of many companies, potentially reducing risk. Note that past history in regard to performance and payments of dividends does not indicate that they will always continue to do so into the future.

It’s important to choose investments that match your needs. If equity income seems appropriate for you, ask a qualified financial professional for help selecting from among the many dividend-paying stocks and stock mutual funds available.

General risks inherent to investments in stocks include the fluctuation of market prices and dividend, loss of principal, market price at sell may be more or less than initial cost and potential illiquidity of the investment in a falling market.

Investors should consider the investment objectives, risks, charges and expenses of the investment company carefully before investing. The prospectus contains this and other information about the investment company. You can obtain a prospectus from your financial representative. Read carefully before investing.

1Source: Standard & Poor’s. Does not represent an investment recommendation. Stocks are represented by the S&P 500, an unmanaged index generally considered representative of the U.S. stock market. Individuals cannot invest directly in any index. Past performance cannot guarantee future results.

© 2010 Standard & Poor’s Financial Communications. All rights reserved.