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CHAPTER 4

INCOME STOCKS. Companies that consistently distribute high dividends fall under this heading. Income stock companies are those that are in mature, stable industries. While their dividends are gener- ally a high percentage of corporate earnings, the tendency for their share prices is to hold fairly steady. This is due to the fact they dis- tribute, rather than reinvest, their earnings.

Income stocks are best held by people who look for their invest- ments to provide cash flow. Those investors seeking growth and share price appreciation are typically disappointed with the perfor- mance of income stocks. However, if you were to participate in divi- dend reinvestment programs (DRPs), over time there would be a large capital appreciation of your shares. DRPs are discussed later.

GROWTH AND INCOME STOCKS. This group is really just a combi- nation of the two previous groups. These are stocks that not only pay a reasonable dividend, but also offer the potential for appreciation over time.

CYCLICAL STOCKS. Cyclical stocks generally follow the business cycle. The housing sector is an example of a cyclical sector because as the economy does well, more people are likely to purchase or build houses. Likewise, when the economy is in a recession or depression, people generally don’t build or purchase new homes. Investing in cyclical stocks is not without risk. Investors who want to make money from cyclical stocks aim to purchase the shares before a market upswing and sell them prior to a market downturn.

DEFENSIVE STOCKS. In essence, defensive stocks are the opposite of cyclical stocks. They tend to perform better when the market is down and, comparatively, worse when the market is doing well. Defensive stocks are used to help balance the risk in a portfolio because of this. These are companies that produce goods that are still in demand when the economy is not doing well. Food and beverage companies are good examples of defensive stocks.

SMALL TO MIDSIZED COMPANY STOCKS. stocks are those from companies that have

Small-cap or mid-cap a smaller market share

than

their

large-cap

counterparts. These

companies

have

shown,

in

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