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 (see chart). The prices of dividend-yielding equities have historically also fluctuated less than non-dividend paying equities.1 Adding a dose 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
4. Interested in a potential tax break? Dividends now are taxed at 15% rather than ordinary income tax rates, thanks to new legislation enacted in 2003.

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 available.

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.

©2004 Standard & Poor’s Financial Communications. All rights reserved.