Income shares [1] are one of two types of stock offered by a dual purpose fund to investors. These provide income [2] to the investor and are determined as a portion of all the income earned in the portfolio. They are paid out on a regular basis.
Income shares are offered in cases where the fund has only a small chance of capital [3] appreciation. The income paid to investors is generated through dividends based upon the way the fund performs. The dividends are based upon the net earnings of the fund. The income is offered as cash or can be reinvested based upon the desires of the fund holder. Dividends are traditionally paid out quarterly, and are considered taxable income.
Because the shares provide income they are well suited to investors who are not looking for long term capital appreciation but would prefer a steady stream of income instead. The owner of the fund receives both the income generated as well as any additional returns available when the fund is dissolved.
While these funds don’t have the same rate of growth as high risk investments, they are considered a good choice for people approaching retirement. Relatively safe even during market and economic fluctuations, the most common risk is that the fund will stop paying dividends if it is no longer profitable. Funds retain the right to cease payment whenever necessary; therefore if this income is needed for regular expenses it may not be an optimal selection.
The other type of share a dual purpose fund might offer is capital shares [4].