Building up a nest egg is important. If you want to attain your long-term savings goals, investing in stocks with growth potential should be a part of how you accomplish it. Not only have growth stocks, as a group, historically outperformed the rest of the stock market over the long term, but they can also be reasonably safe, if you buy a diverse group of companies, and hold them over the very long term.
Three that should be on your list to consider: Internet-only bank BofI Holding, Inc. (NASDAQ:BOFI), payments giant Visa Inc. (NYSE:V), and midstream energy giant Magellan Midstream Partners, L.P. (NYSE:MMP). Looking for growth? Keep reading to learn why these three are worth a closer look.
Invest in what banking will be
Jason Hall (BofI Holding): E-commerce isn't just affecting how people shop. It's also changing how they bank, with millions of people now rarely -- if ever -- stepping inside a local bank branch. While this shift isn't putting banks out of business (as it is some retailers), it's having repercussions in the banking world: Large retail banks are dealing with higher costs to keep the lights on at branches that no longer generate much business.
This is a big part of what makes BofI Holding a superior growth investment. To start, its operating model, without the expense of retail branches, has proven far more profitable than those of its brick-and-mortar peers. This slide from its recent investor presentation shows just how much more efficient its operating model is:
BofI spends about half as much -- as a portion of assets -- on operating expenses as the average similar-sized peer. That, simply put, means more revenue flows to the bottom line. And this is in large part because BofI is already what most banks will look like in another 20 years.
Furthermore, BofI is growing more diverse. In recent years, management has invested in expanding into more lines of business, including commercial and industrial lending, business equipment leasing, and auto lending. This has helped it grow earnings per share more than 30% per year, on average, over the past half-decade.
With less than $10 billion in assets and a market cap of $1.7 billion, BofI is small, well-positioned for years of growth, and already what the future of banking will look like. That makes it an excellent growth stock to help build your nest egg.
A moneymaking machine
Neha Chamaria (Visa): When looking for stocks to build your nest egg, there's nothing like finding a company that's growing rapidly and reinvesting a major portion of its earnings back into its business, to exploit growth opportunities and unlock greater value for shareholders. Credit card giant Visa is a perfect example.
As the chart reveals, Visa has become a moneymaking machine over the years, now converting one-third of its annual revenue to free cash flow. In the past twelve months, the company generated double-digit returns each on invested capital and equity.
With more and more people across the globe warming up to digital payments and plastic money -- India, for instance, has just embarked on an ambitious "Digital India" program -- Visa has enormous growth potential as the world's largest electronic-payments processor.
What matters is that Visa isn't resting on its laurels. From being the first mover to apply for a bank-card clearing license in China to extending its partnership with PayPal Holdings into different regions of the world, Visa is going all out to ride the cashless wave. Shareholders who ride along shouldn't go empty-handed.
In fact, Visa is minting so much money that it has also started paying out bigger dividends to shareholders. While its yield is nothing to write home about, it certainly doesn't hurt if a growth stock also pays a dividend, no matter how small. More often than not, such stocks can successfully carry the weight of building your nest egg.
A different kind of growth
Reuben Gregg Brewer (Magellan Midstream Partners, L.P.): When most people think of growth, they imagine revenue and earnings rocketing higher. Sometimes it's just about rising stock prices. But there's another metric where growth is important -- dividends and distributions. And on that score Magellan Midstream Partners is a leader.
For starters, this oil and natural gas midstream partnership offers investors a high yield of roughly 5.1%. That's more than twice the yield provided by the broader market. But it isn't as high as that of some peers, like midstream giant Enterprise Products Partners L.P. (NYSE:EPD), which has a 6.4% yield. One key reason for the difference is growth.
Enterprise is a massive $56 billion juggernaut; it has $9 billion in spending in the works, but it needs to spend like that in order to keep growing the company and the distribution. It's not an easy task; the problem with Enterprise boils down to the law of large numbers. Its distribution has grown about 6% a year over the past decade.
Magellan is a far more modest company with a $16 billion market cap and around $1 billion in growth spending on tap. Because it's smaller, it will have an easier time continuing to expand. Its distribution has grown around 11%, on average, over the past decade -- roughly three times the historical rate of inflation.
Dividend growth is a key metric to generating long-term returns. And that's right where Magellan shines.
Jason Hall owns shares of BofI Holding and has the following options: long January 2018 $30 calls on BofI Holding. Neha Chamaria has no position in any of the stocks mentioned. Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends BofI Holding, PayPal Holdings, and Visa. The Motley Fool recommends Enterprise Products Partners and Magellan Midstream Partners. The Motley Fool has a disclosure policy.