Institutional investorsinsurance companies, investment trusts, endowment and pension funds invest in different stocks than individual investors. The implication is that these institutions cannot afford to take chances and must count on substantial income to meet their commitments. The stocks in which they invest are indeed blue chips.
On the other hand, it must be remembered that these institutions are managed by professionals, with a keen, bright eye on the market. Despite their size, they can move in a hurry, and get in and out of the market to take advantage of ups and downs.
They are also protected to some extent by the diversity of their holdings, which permits losses in one category to be offset by gains in another. The small investor trying to decide between Goodrich and Firestone hardly has the same flexibility as a trust holding 5,000 shares each of Goodrich, Firestone, Goodyear and U. S. Rubber. By reason of diversity, too, a trust can afford to deal in some stocks more volatile than those the investor-for-income would find most suitable.
Lists, guides, and gauges such as these are grist for the investor's mill, but they provide no certain answers in the search for the appropriate income-producing stock. The conditions under which others buy, and the reasons for which they buy, are not necessarily relevant to your situation or your neighbor's.
Long-run stability is probably the most important single factor in acquiring and holding an income stock, but this is a quality that must be carefully defined. It should be noted that certain categories of industry are traditionally viewed as more stable than others. The utilities companies, the food processors like General Foods, General Mills, National Biscuit, and National Dairy Products, and retail trade Allied Stores, Sears, Marshall Field are all involved in basic products for which there is a demand regardless of the economic weather, and stocks of this sort are frequently found on recommended lists "for income."
It can be argued, of course, that General Motors and U.S. Steel and Douglas Aircraft are also stable. And indeed they are. They are huge, powerful, and dominant in their fields. If the time should ever come when they are considered shaky and unsafe, there would not be much point in looking for stability anywhere in the economy.
Automobiles are a basic but highly competitive commodity; the industry's prosperity depends on selling far more cars than actually are needed to replace those taken off the road each year. Sales resistance in any year can cut drastically into profits and make an automobile stock an uncertain investment for income.
Few industries are more basic than steel, yet it, too, is highly sensitive to fluctuations in consumer demandincluding that of the auto industry, perhaps its largest single customer. Despite the premier ratings given to some of its stock, steel has been traditionally regarded as a "prince or pauper" industry.
Aircraft companies are so heavily dependent on government defense contracts that they, too, cannot be relied upon for consistent prosperity.
Stability, therefore, would seem to require a basic product, or service, manufactured or distributed by an established company in established markets. The ideal is an all-weather product, not subject to seasonal slumps, to changing fashions, or to family budget limitations when money is tight. It should not be past its prime, like coal, leather, or wool, but should not be in an experimental phase, like electronics, atomic energy, and rare earths and metals. It should not require such enormous investments for research and development that per-share earnings will not permit a steady, handsome dividend.