Is it the case that you have to pick either income or growth when choosing stocks? Most investors believe this to be the case, and in fact, it usually is. However, occasionally you can get a little bit of both combined in a good stock at a good price. This sort of opportunity is hard to find, however!
The reason it can be hard to find both is that stocks that provide income to the shareholder in the form of dividends tend to be large, stable companies that are no longer growing rapidly. This means they can generate good profits, and they tend to pay a decent amount of these out to shareholders as dividends. As such, the reward for holding these shares is likely to be mostly dividend payments and not so much price increases in the shares themselves.
On the other hand, smaller more growth-oriented companies may not yet be making much – or even any – profit. The profit they do make they will most likely keep within the business and reinvest to generate further growth. Accordingly, the reward for holding these shares is the possibility that the shares will increase in value, and not that they will pay you regular dividends.
Where Can You Find Income And Growth?
That said, there isn’t necessarily an inevitable trade-off between income and growth. Some shares can offer you a reasonable amount of both at the same time. These shares are sometimes less popular than either string growth or strong dividend shares, as they tend to get missed by many investors in their searches of the market.
However, these stocks should be rated very highly, because if they fall on one front, they can make up for it on the other. Maybe a dividend payment is lower than expected, but this could be compensated by better than expected growth, and vice versa.
With a spare £3,000 in cash sitting around not earning me anything, here is where I would look to invest.
Analyzing The Market
One way to start my search would be to filter the stocks that I am looking at. I can do this by starting out with criteria of what I will consider. Maybe I want a dividend yield of at least 2%, more likely closer to 3%, and I want price grain over the past year of at least 20%. This second criteria might sound like a lot, but you have to factor in the massive dip last year and the very strong recovery since.
If I have settled on these two things the stocks I’m going to consider must-have, then the process becomes much easier as I’ve narrowed down what shares I’ll look into.
Following this approach, several shares stand out. What looks good and why for the investor looking for both income and growth from the UK market?
A few FTSE listed miners stand out right away. Rio Tinto currently offers a dividend yield of just over 8%, and has posted share price growth of 27% over the last year. Both these numbers are very healthy, however, another FTSE miner actually looks even better than this! Anglo American has a slightly lower dividend yield of 5.3% but can shout about its incredible share price increase of 70% over the past year.
Both companies look very attractive right now for those looking to combine income with growth potential. Needless to say, mining is of course a very volatile industry, and can be very sensitive to changes in the global economy. However, globally the outlook looks positive for commodities over the next decade, and both companies have weathered many cyclical downturns before.
Finally, any set of suggestions for where you can find income and growth has to mention the so-called ‘dividend aristocrats’. These are a special category of stock always popular with traditional value investors. This is because they have long-term track records of paying outgrowth dividends. This should be over at least the past 20 years, but there are some indexes of dividend aristocrats which set the criteria as paying growing dividends for 25 years or even more.
If we look at such stocks listed on the main UK market and consider which have currently good dividend yields, a few additional names stand out. Firstly, National Grid the utilities company, which has a dividend yield of just over 5%. National Grid also has operations in North America, and as an essential infrastructure company will almost certainly offer some growth over time as the economy recovers. Secondly, British American Tobacco. This stock has a dividend yield of around 8% and has the sort of ‘recession-proof’ business model that means you can factor in some future growth whatever the macroeconomic weather.
Stocks To Buy For Income And Growth
I would never argue these stocks don’t come with any risk – there is no risk-free way to make money through investing! But I would argue all these stocks have great potential to deliver both income via dividends and have the potential to increase in value over the medium- to long-term too.
As such, these can be seen as suggestions of where and how you might want to investigate if you are searching for both income and growth at a reasonable price in today’s UK stock market.
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