What is an ‘Income Share’
An income share is a class of shares offered by a dual purpose fund. This share class pays out distributions and dividends to its investors. It may also be known as preferred shares.
BREAKING DOWN ‘Income Share’
Income shares are one class of shares in a dual purpose fund. They can be compared to capital shares which are their counterpart in a pooled dual purpose fund offering.
Dual Purpose Funds
Dual purpose funds were introduced in the 1960s and phased out in the 1990s after Internal Revenue Service rules changed taxation on the funds. Popular versions of these funds included the American Dual Vest Fund managed by Haywood Management, the Gemini Fund managed by Wellington Management, Income & Capital Shares Inc. managed by John P. Chase Inc., the Leverage Fund of Boston managed by Vance, Sanders & Co. and the Scudder Duo Vest fund managed by Scudder, Stevens & Clark.
Dual purpose funds were structured as closed-end funds with two share class offerings, income shares and capital shares. The funds offered a limited number of shares to the public in an initial public offering (IPO). Post-IPO the funds traded on exchanges with a market price and an accounting net asset value (NAV) calculated each day. Dual purposes funds were also structured with specific durations. Therefore these funds had a specified maturity date in which they returned principal to their investors.
Income Share Advantages
Income shares targeted investors seeking regular income payments. Accounting mechanisms facilitated the value and incremental income payments made to income share investors. Managers of dual purpose funds invested in a broad range of securities including both equities and debt which paid interest and dividends for investors. At maturity these shares were given first priority in the liquidation and payouts of the fund. Income shares could also be referred to as preferred shares.
Capital shares were the counterpart to income shares. They were also referred to as common shares. These shares were also offered alongside income shares in the fund’s IPO and traded actively on market exchanges. Capital shares differed from income shares in that they did not receive dividends or distributions from investment in the fund. Capital shares relied primarily on the active management of the fund managers for capital appreciation. These funds typically had broad flexibility to invest in a wide universe of securities for capital gains. At the fund’s maturity date, capital shares received second priority for payouts following income shares. Maturity date payouts included principal and any capital gains.