Chapter 5 - Common Stocks Selected For Income

We mentioned earlier that those of a most conservative temperament find greatest contentment in fixed income securities designed to protect principal value. Such persons will stick pretty closely to savings accounts, bonds, or preferred stock. For those of more flexible temperament, willing to accept in good grace the wider fluctuations in market value characteristic of common stocks, but still primarily interested in income, there are some well-tested issues to choose from. These are the common stocks of substantial companies, widely held by institutions which have paid dividends for many years. They represent ownership in companies that play an important part in your daily life. Many of them are in the consumer industries which provide the products and services most essential to individuals and families. They are producers and distributors of foods, tobacco, home furnishings and appliances, oil for heating and motoring, and providers of such vital services as banking and telephone, electric and gas utilities. Because these services and products are so essential to our way of life, the companies providing them have been able to earn money and pay uninterrupted dividends for many years. And this of course is the major test of an "income" stock are its dividends dependable? To assist you in selection of stocks meeting this requirement, here is a list of representative companies.

Stocks with Durable Dividends

                                                                        Continuous
Stocks                                                              Dividends Since
Adams Express                                                1892
Aetna Insurance                                                1883
American Electric Power                                  1909
American Telephone                                         1881
American Tobacco                                           1905
Borden                                                             1899
Chase Manhattan Bank                                     1848
Coca-Cola                                                       1893
Du Pont                                                            1904
Colgate-Palmolive                                            1895
General Electric                                                1899
General Mills                                                    1898
Otis Elevator                                                    1903
Procter and Gamble                                          1891
Texaco                                                             1903

This list was selected quite at random and these are in no sense specific recommendations. You must admit that it's a fine list of companies, and if you never bought any stock other than these, no one would criticize your investment judgment. The list is offered, however, primarily to give you guidance on selection geared to sustained income. These companies have not only paid dividends dependably but there have been increases over the years and, in most if not all cases, cash extras and stock dividends as well.

25 Selected Stocks Which Have Paid Consecutive Dividends Every Year in This Century

Aetna Life Insurance American Express Co. American Telephone and Telegraph Boston Edison Bristol-Myers Co. Colgate-Palmolive Connecticut General Life
 
Consolidated Edison
Diamond Match
First National City Bank
General Electric
General Mills
Hackensack Water
National Biscuit
Norfolk and Western
Pennsylvania Railroad
Pittsburgh Plate Glass
Pullman, Inc.
Standard Brands
Standard Oil of Indiana
Standard Oil of N. J.
Travelers Insurance
Union Pacific Railroad
West Virginia Pulp and Paper
Yale & Towne Manufacturing

25 Selected Stocks with 3 or More Dividend Increases in the 1950 to 1960 Decade

American Can American Gas & Electric American Home Products Beneficial Finance Central Hudson Gas & Electric Cincinnati Gas & Electric Dow Chemical Eastman Kodak Florida Power & Light Florida Power Corp. Franklin Life Insurance General Telephone Household Finance Houston Lighting & Power International Business Machines Jewel Tea Lily Tulip Cup Lincoln Life Insurance Marine Midland Corp.

Minnesota Mining & Manufacturing National Dairy Products Plymouth Oil Southern Natural Gas Stauffer Chemical Texas Utilities

In selecting stocks for dependable income, it is obvious you will be choosing from quality issues since younger, less tested companies simply haven't been around long enough to establish an extended record for dividend payment. Any reliable broker will gladly supply you with the dividend record of the company that interests you; and there are dozens of fine issues in addition to the ones cited which should serve you well.

Income-type stocks are especially desirable for those in middle and later life seeking to pin down a dependable supplementary income for retirement years, and to whom stabilized income at a comfortable level is more important than growth in market values.

The companies whose shares are prized for income usually pay out, in the average year, somewhere between 65% and 75% of net earnings in cash dividends, and a regular rate once established is unlikely to be reduced because of poor results in a single year. In such cases, the dividend is maintained and paid if necessary out of surplus from earlier years.

One word of caution. Don't "reach" for dividend income. Often the highest yields are dangerous, and historically many shares showed their highest yields just before their dividends were either reduced or omitted. In your own search for income stocks, you will find some of the highest yields among railroad companies and in the "extraction" industries copper, lead, zinc, etc.

Higher Yielding Stocks

Railroads have felt increasing competition with truck, motor car, and water carriers, and some have been bogged down by losses on passenger traffic. So if you buy rails for income, buy only among the strongest companies Atchison, Union Pacific, Atlantic Coast Line, Northern Pacific, etc.

In the extraction industries, you can see the reason for high yields the source of earning power is dwindling. Every ton of copper or iron ore removed depletes the assets and earning power by just that much. So in buying mining shares for income, be sure there are vast ore reserves to count on.

In the foregoing you have been given some background for the selection of income stocks.

The actual current yield you get at the time of purchase will depend importantly on the condition of the stock market at the time. If it is quite high as in 1959/ 60, the yield you may get on a good "income" stock may only be around 4% to 4¼%. In lower markets, yields are higher and in 1951 you could have bought a fine list on a 6% basis. A smaller current yield shouldn't discourage you too much, however, as many companies have a record of increasing dividends as earnings permit. For example, the following companies increased their dividends four times or more in the 1950/59 decade: American Electric Power, American Home Products, Central and Southwest Corp., Florida Power and Light, General Foods, General Telephone, Jewel Tea, Commercial Credit, Southern Natural Gas, Continental Can, and Southern Pacific.

So just because you have set dividend income as your principal target, don't ignore those companies which may not be immediately attractive on a yield basis but may be in line for important dividend increases in following years. Credit and finance companies, utilities in rapidly growing territories such as Gulf States Utilities or Houston Lighting and Power, and natural gas companies such as El Paso and Texas Gas Transmission are representative of companies of this sort.

Buying common stocks for income is a sound idea. Do your own research, consult with a responsible broker and you should expand your income and add zest to your life.

Resume

1. Look for issues with long, unbroken dividend record.

2. Prefer Companies selling consumer goods and services.

3. Don't "reach" for yield.

4. Too high yields can be misleading and dangerous.

5. Search for sound companies that have not only paid dividends regularly but have increased them and can do so again.

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