What Makes a Great Income Stock

Focus: STOCKS

Kelley Wright Image Kelley Wright Managing Editor, Investment Quality Trends

While many newcomers to the income sector would immediately say “yield,” that's not the case. To find a good long-term income stock, you have to look at a few other more important fundamentals before you get to the yield, writes Kelley Wright of Investment Quality Trends.

While yield is important—it is after all a measure of return on investment—it isn’t the end all be all of value identification.

What we have found is the best of the best are businesses that offer products and services that consumers want and need. They have management teams that demonstrate managerial competence over long periods of time. They have long-term track records of earnings and dividend improvements.

The percentage of earnings paid out in the form of dividends (the payout ratio) is sufficient to reward the shareholder while allowing the company flexibility to maintain and grow the business. Debt is managed and as used as a tool rather than as a crutch or a mask to cover up deficiencies or mistakes.

These companies are generally recognized as a leader in their field, a brand name if you will. For example, if you go to the store to buy soft drinks, bottled water, orange juice, or one of the new performance drinks, what company immediately comes to mind? My guess is it is either Coca-Cola (KO) or PepsiCo (PEP).

If you’ve got a mini-van full of hungry kids you have picked up from several different locations after a long day at work and the thought of going home and cooking makes your head spin, what more welcome site is there than the Golden Arches of McDonald’s (MCD)?

While buying a great company that is an easily recognized brand is important from the qualitative standpoint, your work as an analyst and investor is still only half done.