A growth-based perspective on income investing


We've been accused of having a one-track mind when it comes to our message to investors (invest capital in well-run companies positioned in front of fertile fields for future growth). While we take that as a compliment, we decided that, just in case some readers might be a little tired of reading about the importance of growth (if it is possible to get tired of that subject), we decided today to change the subject and talk about income-producing securities instead.

At Taylor Frigon Capital Management, we recognize the need for some investors to own income-producing securities. Because of the danger posed by inflation, we believe that growth in most cases needs to be the foundation of an investor's portfolio, with income playing an auxiliary role "on top" of the foundation of innovative, growing companies (see here and here).

In the Income Strategy that we manage for investors, however, we don't exclusively own fixed-income instruments such as bonds: instead, we seek a variety of income sources, including floating-rate debt instruments, preferred stock, and common shares in companies that pay royalties or dividends.

The important thing for investors to remember is that, in order for the dividends or interest payments of a company to be secure, that company has to have the ability to stay in business. For common stock that pays a dividend, the best way for that company to be able to raise the dividend is for that company to have fields for growth! In other words, we may be sounding like a broken record again when we urge income investors to consider growth as an important criteria when evaluating a potential income investment.

Friday's announcement by Intel Corporation that they will be raising their dividend by 15% to 18 cents per share per quarter (or 72 cents per share per year) is a perfect case in point.*

While we own shares of Intel Corporation for our Income Strategy, one of the reasons we are comfortable owning it is the company's continued ability to add value and grow. In announcing the approval of the increased dividend, Intel CEO Paul Otellini said, "Intel remains on track to have our best year ever and we continue to generate strong cash flows. Our ongoing operational performance and confidence in our business going forward provide the ability to return more cash to shareholders."

We agree with Mr. Otellini in seeing the connection between future growth and dividend yield, and urge our readers to consider this important aspect of investing for income as well.

* At the time of publication, the principals of Taylor Frigon Capital Management owned securities issued by Intel (INTC).