SHARES

Are income stocks investors in for a shock?

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From time to time, "Mr Market" becomes obsessed with certain concepts. At the turn of the century it was any stock with ".com" or "tel" at the end of its name. More recently, the catchphrase "stronger for longer" was bandied about in relation to China's seemingly insatiable demand for resources.

In 2015, we know more than the investors of 1999 and 2000 about how the internet has transformed the world. And it hasn't been in the ways most investors expected at that time. Huge sharemarket winners such as realestate.com.au (now REA Group) and seek.com.au didn't list until 2005.

Similarly, the resources boom evolved differently from what many investors (and management teams) expected. In BHP Billiton's 2008 annual report, the giant flagged that it would be producing "as much product as fast as possible". It wasn't alone and export volumes soared. Then supply and demand came into play and prices subsequently plummeted.

looking glass

You can see how a sensible initial insight ("the internet will change the world" or "­China's resources demand will be voracious for many years") can bring investors unstuck unless they consider all aspects and properly think it through.

Beware the good ideas

Legendary investor and educator Ben Graham taught his protege, Warren Buffett, that "you can get in way more trouble with a good idea than a bad idea because you forget that the good idea has limits".

Today income stocks are capturing the collective imagination. In a world of record-low interest rates, stocks offering potentially growing income streams coupled with capital gains are tempting propositions. I love receiving dividends as much as the next investor. And analysis has shown that dividends provide more than half of the sharemarket's returns over time; there's no denying they're crucial.

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