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5 Stocks for Growth and Income

It's sometimes easy to forget that, just like mint-chocolate ice cream, the total return from a stock is a delicious combination of two factors: an income return from dividends and capital appreciation of the stock's price.

Both are equally important, though you'll be hard-pressed to find headlines in The Wall Street Journal highlighting the fact that Johnson & Johnson's (NYSE: JNJ  ) income return made up 27% out of the stock's 47% total return over the past decade. That's right, over the past decade, the slow-and-steady dividend returns have accounted for the majority of the stock's return.

You don't hear about dividend returns very often because … well, they're not sensational like big daily price swings are, and thus don't make good breaking news stories on CNBC.

Good things come in small checks
Still, dividends deserve more of your attention. Not only do they provide a steady and real return of cash, but pared with a growing company they can also be reinvested to buy more shares and augment your overall return. Consider the case of Tupperware (NYSE: TUP  ) , which was initially hit quite hard by the financial crisis and concerns about consumer spending.

The stock fell 67% from $32.87 on Jan. 2, 2008 to a low of $10.91 in March 2009. Fortunately, Tupperware has since recovered and trades for about $48 today. Had you bought shares for $32.87 in January 2008 and held them through today, your return would be 46%. Nice, but had you reinvested your dividends over this two-year period, you would have added shares when the stock traded in the teens and today your returns would instead be 60% -- 14 percentage points better than if you hadn't reinvested.

That's the beauty of reinvesting dividends -- it forces you to invest more without having to think about it.

To find stocks that can deliver both growth and income, I used the following screen:

  1. Return on equity greater than 15%: We want our companies to earn market-beating rates of return on their equity.
  2. Sufficient free cash flow cover (less than 60%): It's important that our companies generate enough free cash flow (cash from operations minus capital expenditures) to cover their dividend payouts and increase them down the road.
  3. Dividend yield over 2%: With the S&P average yield currently around 2%, we want to generate enough income to make it worth our while.

Here are five stocks that meet the criteria for growth and income:


Return on Equity

Free Cash Flow
Payout Ratio

Dividend Yield

Caterpillar (NYSE: CAT  )




Garmin (Nasdaq: GRMN  )




PepsiCo (NYSE: PEP  )




Hillenbrand (NYSE: HI  )




McDonalds (NYSE: MCD  )




*Data provided by Capital IQ, as of Nov. 24.

The one name you probably don't recognize in this table is Hillenbrand, the parent company of the Batesville Casket Company. Even though it's flying under many an investor's radar, as you can see, it stacks up pretty well against the other results.

Hillenbrand was my recommendation in the recently released Motley Fool Stocks 2010 report, for which I was also the lead analyst. What I found particularly interesting while I gathered the other stocks for this year's Stocks report was eight of the 10 picks made by your Fool advisors and analysts fit into the growth and income niche, posting an average yield of 2.65%. Combine that nice income return with solid earnings growth potential, and I think we've put together a pretty strong group of growth and income stocks.

Put the cash to work
Whatever your risk tolerance or time horizon, don't underestimate the importance of income returns for your portfolio. Indeed, dividend stocks can end up being the most unlikely growth stocks you'll ever own because, among other things, dividend payouts force managers to allocate capital more efficiently, delivering superior and more sustainable returns for shareholders.

If you're looking for more dividend stock ideas, our Motley Fool Income Investor service can help. Advisor James Early and the Income Investor team recommend both stocks with high yields and those focused more on dividend growth. At present, their picks yield 4.3% on average and have outperformed the S&P by 7 percentage points on average since inception in 2003.

And, hey, if you decide to sign up for Income Investor, I'll be happy to throw in a free copy of our Stocks 2010 report.

Click here now for more information.

Fool analyst Todd Wenning would like to give a great big "Who Dey?!" shout-out to the Cincinnati Bengals -- he can now wear his Ochocinco jersey around the office with his head held high. He owns shares of Johnson & Johnson, a Motley Fool Income Investor pick. Tupperware and PepsiCo are also Income Investor selections. Garmin is a former Global Gains pick. The Motley Fool has written puts on Tupperware and has a disclosure policy.

Read/Post Comments (15) | Recommend This Article (95)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 27, 2009, at 6:34 PM, motleymarty wrote:

    I am in complete agreement. Especially for investors just beginning the journey that is stock investing, the thing that will most put a smile on your face is receiving dividends from solid companies that continue to pay dividends - even in bear markets. Make no mistake about it. You just sit back, the $ rolls in like clockwork. If you're patient, don't fret about daily price swings and have parked cash in dividend paying stocks of well-managed companies, you won't be disappointed. Somewhere down the line one of your picks might "pop" as I like to call it: Ahhh, the sweet sound of a champagne cork [the growth side of the story].

  • Report this Comment On November 28, 2009, at 9:55 PM, tomd728 wrote:

    Going forward in a Market that has been called "overbought", "overdone", "overdue", the callers finally have one right IMHO.

    Dividend paying, high quality, well managed companies will have their day again. I believe the time to buy them is now to lock in yield as that attraction also has a window.

    The other shoe has to fall and not even the Hedge Funds, Mutual Fund managers playing catch-up or

    John Q. will be able to push high P:E "growth" companies higher.

    You do the math off the Dow over time or whatever index you chose and that is the process that never fails over time with dollar cost averaging.

    No averaging here though.......get in on yield and sleep well.


  • Report this Comment On November 29, 2009, at 1:21 PM, VegasMartin wrote:

    I agree. I don't understand why anyone would buy a government bond when they could put their money into a fundamentally sound company with a juicy dividend. I like VZ, PEP, COP, and INTC.

  • Report this Comment On November 30, 2009, at 6:33 AM, naspinski wrote:

    I would be wary about Garmin right now with the release of Googles completely free GPS for Android... making GPS devices and pay-for-map systems much less appealing to many users.

  • Report this Comment On November 30, 2009, at 5:09 PM, deadaphids wrote:

    A good, timely item on not forgetting TOTAL income on your investments; some basic, trenchant analysis on some equity choices for growth AND decent dividend income.

    . . . and you've gotta love a casket company carrying the stock symbol "HI."

  • Report this Comment On November 30, 2009, at 5:31 PM, RobertC314 wrote:

    Great idea, and good point naspinski. GPS nav is quickly becoming a commodity; the question is has that already been priced into the stock? GRMN is trading at less than 1/4 of its all time high and has a PE of just 10. That being said, they currently enjoy a 21% profit margin that will almost certainly be under fire as more viable free GPS options become available.

  • Report this Comment On November 30, 2009, at 5:59 PM, gogojoann wrote:

    Additionally, I think most of you Fools are in a different age bracket than I. As a senior living on a fixed income, but with most of my estate in stocks, it is nice to pick up a dividend check... not to reinvest, but to add a little jingle in the pocket on months when things seem a bit too tight. My quarterly dividends add much to my life and my ability to do things that otherwise I would have to decline. Just another way to look at dividends... thanks for listening....

  • Report this Comment On November 30, 2009, at 6:43 PM, OPTIONNUT wrote:

    Ok Fools,

    My thoughts are that You Guys come up with the Mr. Obvious on your picks and are many times wat to late.

    Look at your pick on F, it was a least two to three weeks to late.

    Now lets go back and address something like your earlier recommendations like ILMN. Even Cramer owns up to his you Fools ever do this?

    Second time Caller, First time for a real Pissed complaint.

  • Report this Comment On November 30, 2009, at 6:46 PM, Zaneyjaney wrote:


    Can you shed any light on their latest statement, which shows no dividend paid out for the last quarter? I'd hate to pick up the stock for its divvy, if there is none!



  • Report this Comment On November 30, 2009, at 6:50 PM, Zaneyjaney wrote:


    Can you shed any light on HI's latest quarterly statement in September, where they did not pay out a dividend? I'd hate to pick up the stock for its divvy if it is now history!



  • Report this Comment On November 30, 2009, at 8:31 PM, UKIAHED wrote:

    Hillenbrand, Inc.

    2009 2008

    First quarter $ 0.1850 N/A

    Second quarter $ 0.1850 N/A

    Third quarter $ 0.1850 $ 0.1825

    Fourth quarter $ 0.1850 $ 0.1825


    This is the 4th Q for HI - per the 10-K (year end as they are a fiscal year reporter) they will be paying .1850/share.

    Per the comments section of the 10-K:

    "We currently expect that comparable quarterly cash dividends will continue to be paid in the future. "

  • Report this Comment On December 01, 2009, at 4:47 AM, opentrail wrote:

    I think Garmin and TomTom will have a cut in their market share from the Google Android invasion but not significantly. After all, Google's maps own maps are proving to not be that accurate compared with the TeleAtlas maps (owned by TomTom) and how many people actually hold a v2 Android phone that has this capability?

    No I think both companies will see reduced margins in competitive devices that perform just as well and have very aggressive pricing. Funny that all these models are actually made in Asia.... Both companies need to skim the lard off and reduce costs drastically to survive or else come out with something totally new that they create there own market niches. Unlikely with 3G networks as they are also proving to be a disappointment in bandwidth and availability at least in Europe.

  • Report this Comment On December 01, 2009, at 9:34 PM, jm7700229 wrote:

    Just a comment on Garmin: I own three Garmins, a Lowrance, a Magellan and a TomTom; 3 are for cars, one for an airplane, one for a boat and one for hiking. I looked at the Android and I don't see it replacing any of my current machines.

    I do agree that a very price competitive market will develop at the low end. At the middle (me) and upper ends, people, especially heavy users like me, will still be willing to pay a premium for the most useful.

  • Report this Comment On December 04, 2009, at 7:33 PM, Latimeria wrote:

    This is a interesting and useful article..

  • Report this Comment On December 07, 2009, at 5:48 PM, rovobo wrote:

    In regard to dividend paying stocks. I have been invested in DNP select for 10 years, all dividends have been reinvested I can't give an exact figure on gains as I have purchased shares at many different prices,but I have doubled my investment and then some some dividends have come from capital

    but this stock is in an IRA so it does,nt hurt me

    tax wise

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