What if the growth-versus-income debate wasn't an either-or proposition? Investors have long tried to balance their portfolios between stocks that have the potential to rapidly appreciate in value and those that will generate steady cash flow from dividends. But in the modern market, some stocks can offer both.
We asked three Motley Fool contributors to identify companies they think offer the best of both worlds. Their picks? MKS Instruments (MKSI -3.50%), Nvidia (NVDA -10.01%), and Walker & Dunlop (WD 1.40%).
The semiconductor-sector lynchpin
Anthony Di Pizio (MKS Instruments): Advanced computer chips have become arguably the most important component in modern manufacturing because such a large -- and growing -- number of consumer products require them, from smartphones to cars. The industry is expected to be worth over $1 trillion annually within the next decade, and investors would do well to try and capitalize on some of that growth.
MKS Instruments, through its expansive list of industry services and tools, claims to touch every single semiconductor manufactured globally. It supports every step of the fabrication process, helping chipmakers solve the complex challenges of producing ever-smaller, more powerful chips that also perform at the highest level.
The company generated $3 billion in revenue over the past four quarters, which gave it a robust growth rate of 20% despite persistent supply chain disruptions. But MKS Instruments is delivering even more effectively on the profitability front. The $11.54 in non-GAAP earnings per share it booked over the same period amounted to a 36% year-over-year jump.
With a price-to-earnings ratio of just 8.7 compared to the Nasdaq 100 index's ratio of 24.6, MKS stock is valued about 64% cheaper than the broader market. Yet even though that suggests great potential upside in its stock price, MKS also offers investors a quarterly dividend of $0.22 per share, which at recent stock prices gives it an annual yield of 0.85%.
It's not a groundbreaking return, but when combined with the stock's growth potential, it sweetens the deal for investors who are thinking about building a position.
Paying you for your patience
Jamie Louko (Nvidia): Since 2014, leading chip maker Nvidia has been paying a dividend. Today, its yield is just 0.11%, nearly at its lowest level ever. And its payout ratio is just 4%.
However, management sees better ways to create shareholder value than by paying out a larger dividend right now. Nvidia is currently trying to capitalize on a set of opportunities in chip markets it believes are worth a total of $1 trillion annually, so it is funneling most of its $9.5 billion in trailing 12-month net income into pursuing them.
This chipmaker is already a leader in its core industries. Over 200 million gamers use its GeForce gaming graphics processing units (GPUs). However, while the gaming market has long been its bread and butter, the company has also seen tremendous growth in the data center market. Sales in this segment skyrocketed 83% year over year to $3.75 billion in its fiscal 2023 first quarter, making it Nvidia's most significant revenue source. It also dominates the professional visualization space, holding a greater than 90% market share in GPUs for workstations.
While much of the company's opportunity will come from its mature markets, Nvidia is looking to extend its dominance in emerging segments like enterprise artificial intelligence and Omniverse software. So far, Nvidia is succeeding. Many of the world's largest enterprises -- like Amazon and PepsiCo -- are already adopting Nvidia's Omniverse software for the design and simulation of realistic 3D digital images and spaces.
It will take a long time for Nvidia to reach its full potential in these emerging segments, but considering its chips are seen as the gold standard in some industries, the company looks poised to capture this opportunity. Long-term investors who want to capitalize on that can invest today, and the company will pay them small dividends to reward their patience as they wait for those markets to mature. That's an appealing deal -- one that you might not want to pass up.
Addressing the need for affordable housing
Trevor Jennewine (Walker & Dunlop): Residential real estate prices in the U.S. continued to soar in June. The median sales price for existing homes jumped more than 13% year over year to $416,000 as demand persisted in spite of rising interest rates. That trend has left many Americans in a difficult position.
Today, only 54% of new and used housing stock is affordable to buyers making the median household income, down from 79% in 2012. In the coming years, high demand for single-family housing will likely spill over into the multifamily market, and financial services provider Walker & Dunlop is well-positioned to benefit.
Walker & Dunlop ranks as the largest provider of capital to the multifamily housing industry in the U.S. and the fourth-largest lender in commercial real estate, a market estimated to be worth nearly $900 billion in 2022. In addition to debt financing, the company also services loans and provides asset management services with a focus on affordable housing through low-income housing tax credit syndication. In other words, Walker & Dunlop manages third-party capital invested in tax credit equity funds targeted at growing the supply of affordable housing.
Thanks to that strategic market position, the company once again delivered strong financial results in the first quarter. Transaction volume jumped by 40%, fueled by particularly impressive growth in property sales volume. In turn, revenue rose 42% and earnings climbed 18%. Shareholders have good reason to expect that momentum will persist, even in a rising interest rate environment.
Record-high housing prices will continue to create demand for more affordable alternatives, and multifamily starts are expected to reach 600,000 by 2023, up 27% from 472,000 in 2021. That will create a significant debt financing opportunity for Walker & Dunlop. Additionally, $237 billion in multifamily mortgages will mature over the next three years, up from $100 billion in the last three years. That creates a big refinancing opportunity for Walker & Dunlop.
Finally, the company currently pays a dividend of $0.60 per share, which at recent share prices gives it a yield of 2.28%. That's well above the S&P 500's average yield of 1.69%, making this stock a particularly attractive buy right now.
