LONDON -- Some investors prioritize capital growth through a rising share price; some prioritize a high income from a juicy dividend yield. But some shares -- growth-and-income shares -- offer investors a bit of both.
The following 10 companies from the UK's elite FTSE 100 index have all grown both their earnings per share and dividends by an annual average percentage in double figures, and all have a current dividend yield of 3% or higher.
Recent share price (in pence)
Average four-year EPS growth (%)
Average four-year dividend growth (%)
Dividend yield (%)
|British American Tobacco (LSE: BATS.L )||3,310||16||20||16.9||4.1|
|BHP Billiton (LSE: BLT.L )||1,930||11||13||9.6||3.6|
|British Sky Broadcasting||767||20||11||15.0||3.3|
|Melrose (LSE: MRO.L )||247||30||19||16.3||3.0|
Most of these companies should be able to continue growing their earnings and dividends comfortably ahead of inflation. Let me tell you about three in particular, which are very different kinds of business and show that good growth-and-income shares can be found in most market sectors.
British American Tobacco
You'd be hard pressed to find a more consistent growth-and-income performer than British American Tobacco. The world's second largest quoted tobacco group by global market share has grown its earnings and dividend relentlessly through economic boom and bust alike.
BAT's 200-plus brands are sold in around 180 global markets, and in 50 of those it is the market leader. An addictive product, repeat revenues, and increasing tobacco consumption in emerging markets have been the drivers of BAT's consistent growth. There's no indication of this changing any time soon.
BAT's current price-to-earnings ratio of close to 17 is an indication of investor demand for "safe" shares in the prevailing uncertain economic conditions; indeed, the shares have risen around 40% over the past two years against a broadly flat market. Back in 2009, when investors were piling into beaten-down cyclical companies in the "dash for trash," you could have picked up BAT's shares on a P/E of around 13 and a yield in excess of 5%. So, there have been -- and are likely to be again at some point -- more favorable times to invest in this growth-and-income stalwart than today.
Global resources company BHP Billiton is the world's largest miner by revenues. The Anglo-Australian giant, which has substantial oil and gas interests in addition to its mining operations, has been a relatively stable performer in a notably cyclical industry.
BHP Billiton's shares did suffer in the bear market of 2008-09, but nowhere near as badly as its peers. Furthermore, the company was able to continue increasing its dividend while many in the industry were busy suspending or slashing theirs.
Mining shares are once again out of favor, because investors are concerned about global demand for natural resources -- in particular, demand from China. Miners are certainly seeing a hefty drop in their earnings this year and are reining in their capital investment. But if demand picks up again in the next year or two, BHP Billiton -- with its current P/E of less than 10 and relatively high yield for a miner of 3.6% -- will be looked back on as quite a bargain.
Ranked at 91 in the FTSE 100, with a market capitalization of 3 billion pounds, Melrose is tiny compared with megacaps BHP Billiton and BAT, whose valuations run to tens of billions. The company was floated on AIM as recently as 2003, moved to London's main exchange in 2005, and still has plenty of scope for growth.
Melrose's business is quite unlike any other in the FTSE 100. It buys good manufacturing businesses with strong fundamentals, whose performance can be improved by targeted investment and shaking up management. Having increased margins and grown the value of the business, Melrose then disposes of it and returns the proceeds to shareholders.
In addition to growing its dividend from 3.4 pence in 2007 to 7.4 pence last year, Melrose has also made a total capital return to shareholders of almost 90 pence a share during the period. Melrose isn't cheap on a P/E of over 16 and a yield of 3%, but arguably its fine record of delivering growth and income for shareholders more than justifies the rating.
Growth and income
Growth-and-income investing can be a highly profitable strategy. You need look no further than ace City investor Neil Woodford, whose funds have beaten the wider market by more than 300% in the last 15 years.
One of the shares I've highlighted is a Woodford favorite and features in an exclusive Motley Fool report -- "8 Shares Held by Britain's Super Investor" -- which is free to download right now. If you're interested in learning about Woodford's enormously successful strategy and discovering his favourite large caps with good dividends and steady growth potential, simply click here for your free report.
Further investment opportunities:
- How to Unearth Great Oil & Gas Shares
- The FTSE 100 Share Warren Buffett Loves
- What Every New Investor Needs to Know