Income investors missing a trick

At a time when interest rates remain low and the stock market is volatile, gaining income through the right investment is becoming more widely accepted by people originally not willing to take the added risk with their savings. A new study by The Share Centre reveals income investors could be missing a trick.

Vodafone, Royal Dutch Shell, HSBC, GlaxoSmithKline and United Utilities are amongst the top income producing companies in the FTSE100, however research revealed that 45% of income investors don't hold any of these stocks within their portfolio.

Income investors may also be looking to the wrong sectors. 43% favour the banking sector, however banks are no longer the income producing stocks they once were. Surprisingly, over a quarter (26%) stated they invest in technology stocks for income, a sector predominantly geared towards growth.

The research reveals reasons why investors are seeking income, with almost half (47%) doing so to supplement their disposable income, whilst 61% are funding their retirement.

The appetite for income is higher in new-to-market investors, suggesting they are driven to the market by low interest rates. 36% of income investors started investing in the last two years, compared to 17% of investors with between 5 and 10 years experience and 12% that have been investing for 10 or more years.

Helal Miah, investment research analyst at The Share Centre, said:  "The current low interest rate environment means the returns once available from savings accounts are no longer possible. Consequently, investing for income is becoming a way to gain an alternative flow of income despite the increase in risk. 

"Even when investing for growth the power of income investing should not be overlooked. Stocks that produce an income tend to be large mature companies that distribute a proportion of their earnings. Also, reinvesting the dividends can lead to surprisingly positive results over the long term."

"For example, a £10,000 investment in BP on 24 November 1988 would have bought you 8023 shares. Through growth in the share price, as of 25 September 2012 those shares would be worth £35,782.58. However, historically BP has paid investors a dividend income and for the same period this amounts to an extra £47,209.73."

Our top five income stock picks:

1 United Utilities
2 BP
3 Centrica
4 GlaxoSmithKline
5 Vodafone