The best income investments are companies with a long history of cash flow and dividends

Income stocks are stocks that produce above-average income, usually in the form of dividends.

When you pick the best income investments, you are, for the most part, investing in safer and less risky companies. That’s in large part because of the dividends that the best income stocks pay. Dividends, after all, are much more stable than earnings. More important, dividends are impossible to fake—either the company has the cash to pay dividends or it doesn’t.

Two key guidelines we use for picking the best income investments

1. Above-average dividend yields: You can identify income stocks by their high dividend yields (the percentage you get when you divide a company’s current yearly payment by its share price). For example, stocks with a dividend yield higher than, say, 3% would typically be attractive to an income-seeking investor.

However, it’s important to avoid judging a company based solely on its dividend yield. That’s because a high yield can sometimes be a danger sign rather than a bargain. For example, a company’s dividend yield could be high simply because its share price has dropped sharply (because you use a company’s share price to calculate yield). That can be a sign of an imminent dividend cut.

2. Maintaining or increasing dividends: Apart from a high dividend yield, you should look for stocks that have a long history of paying (and raising) their dividends. For a true measure of stability, focus on those companies that have maintained or raised their dividends during economic and stock-market downturns.

That’s because these firms leave themselves enough room to handle periods of earnings volatility. By continually rewarding investors, and retaining enough cash to finance their businesses, they provide an attractive mix of safety, income and growth.

Dividend stocks are some of the best income investments because dividends don’t lie

At TSI Network we think investing in dividend stocks is one of the best investment decisions you can make. Dividends serve as a way for companies to share the wealth they accumulate through successfully operating their businesses.

Dividends are cash outlays that an unsuccessful company could never produce. A history of dividend payments is one thing that the best dividend stocks all have in common.

These payouts are drawn from earnings and cash flow and paid to the shareholders of the company. Typically, these dividends are paid quarterly, although they may be paid annually or monthly as well. Dividends can produce as much as a third of your total return over long periods.

Some financial factors you should look for in dividend growth stocks

Dividend history is very important to dividend growth stocks. Ideally, you should look for dividend growth stocks that have been paying dividends for 5 or more years. As a general rule, companies that make money regularly are safer than chronic or even occasional money losers. Companies can fake earnings, but dividends are cash outlays. If you only buy dividend-paying value stock picks, you’ll avoid most frauds.

What is the dividend growths stock’s debt load like? Would it have a hard time recovering from an economic downturn? The more manageable the debt, the better. When bad times hit, debt-heavy companies often go broke first. Especially ones that also keep trying to allocate part of their cash flow to paying dividends

Some of the best income investments are Utilities and Canadian banks

Utilities and Canadian banks generally pay high, secure dividends, and have long histories of raising their payments, even during downturns. However, you’ll still want to make sure your portfolio is well-diversified across most if not all of the five sectors.

While we continue to recommend that you spread your investments out across the five main economic sectors (Manufacturing & Industry; Resources; Consumer; Finance; and Utilities), the proportion of holdings you devote to each sector depends on your temperament and financial goals.

For example, if you’re an income investor, you may wish to place more emphasis on Utilities and Canadian banks. That’s because these firms generally pay high, secure dividends, and have long histories of raising their payments, even during downturns.

By diversifying across most if not all of the five sectors, you avoid overloading yourself with stocks that are about to slump simply because of industry conditions or investor fashion.

You also increase your chances of stumbling upon a market superstar—a stock that does two to three or more times better than the market average.

Have you selected any of the best income investments using these tips? Share your experience with us in the comments.