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What is Equity Income?

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  • Written By: Adam Hill
  • Edited By: Heather Bailey
  • Last Modified Date: 21 September 2016
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Equity income refers to income generated by existing assets, such as real estate or stock. It usually refers specifically to dividend income from stocks, meaning whatever portion, if any, of a company's earnings that the company returns to its shareholders. Equity income is very different from many other ways of generating money through the ownership of stock. It almost presupposes a buy-and-hold strategy, rather than one where trades are made often. Many investment strategies are centered around generating equity income in this way, and equity income funds also exist, letting investors take advantage of this strategy without constantly managing their own portfolios.

There are many reasons that an investor may want to focus his portfolio on equity income, or at least include it in his investments. In a time of relatively low interest rates, for example, it may be difficult to achieve a good rate of return through instruments such as certificates of deposit (CDs). A portfolio that includes dividend income may earn a much higher rate of return, in terms of percentages, than a CD. Also, dividend income is not taxed as heavily as other forms of investment income in some countries. Any type of income that the investor keeps more of may well look more attractive.

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There are investment funds tailored around almost every kind of strategy, and dividends and other equity income are no exception. These mutual funds often seek out reliable companies to invest in, which have a history of paying at least a moderate-sized dividend. Of course, the appreciation of one's initial investment is still important, and also factors in as one of the investment objectives of these funds.

As with any investment strategy, the investor should always stay well-informed on new trends and developments that can affect him. For example, foreign stocks may be paying higher dividends now and then, compared to domestic ones. This is true regardless of what country the investor lives in. Care should be taken, however, to understand foreign markets, and not assume that trends regarding equity income are the same in all markets.

One example of this is the fact that, in the markets of many Western nations, companies traditionally try to increase the dividend payout year after year. This does not always happen, but it is still seen as desirable. This is not usually true, however, in the markets of Asian countries. Generally speaking, a company's dividend payout level is not considered sacred from one quarter to the next, and can change just as much as the company's earnings do, in good times and bad.

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