The 10 Best Income Stocks

"The 10 best income stocks," the headline for this piece trumpets. I certainly intend to deliver on that promise. Before this column is over, you will find a list of what I believe are the 10 best income stocks to buy now.

But a minor piece of business first: What exactly characterizes the best income stocks now? Let's take that concept apart piece by piece to see what we're looking for.

Best income means most income, but it also means reliable and rising income. At a minimum, any "best" income stock should yield more than the 2.8% offered by the two-year Treasury note now. An investor willing to hold that Treasury note to maturity is safe from any likely increase in interest rates because the note will return the investor's capital at maturity. Even the safest stock is riskier than that and should pay more.

But best income also must be reliable. The company must be able to pay that dividend this year and next year and the next, just like a bond does. For example, Net Perceptions(NETP) carries a dividend yield of 192% based on its Sept. 3, 2003, payout of $1.50 a share in dividends and a recent share price of just 83 cents.

But nobody should count on Net Perceptions paying out any dividends ever again. The company is in the midst of a bitter liquidation battle and is appealing a Nasdaq order to delist the stock. The $1.50 payout last September was, as the company said at the time, a return of investors' capital and not a dividend paid from profits.

And because this isn't a bond, my definition of best income also includes rising income. An investor who continues to hold stock in a company that increases its dividend over time will receive an increasing cash flow from that original purchase each year. That way, investors have the magic of dividend compounding working in their favor.

Best income stock means, at worst, a stock that doesn't fall in value; at best, it means it appreciates in price. Nobody should expect that even the best stock will never fall. What counts is that the price is stable or better over some reasonable period, say two years to match the two-year maturity of our benchmark Treasury note. The best income stock will be stable enough so that the investor willing to hold for two years has a very good chance of seeing a return of the original invested capital.