Most people look for one of two things from their investments. They either want something that will provide them with a stable stream of income, or they want an investment that will grow in value over time. If you can discover a single investment that gives you both income and growth potential, you've pretty much found the Holy Grail of investing.
Looking for income
Income investors are generally known as a fairly conservative lot. They gravitate toward bonds and other fixed-income investments that generally give them little or no opportunity to see their principal grow. Although free of default risk, ultra-safe investments like Treasury bonds and FDIC-insured bank CDs can't protect your portfolio from the ravages of inflation over time. In addition, most income-producing investments generate a substantial tax hit.
Moreover, even those income-seeking investors who are willing to put their money in the stock market often tend to stick with solid, stable, low-growth companies. They don't have much pizzazz, but they do provide a constant stream of income without quite the same level of volatility you'll find in more aggressive stocks. Companies like GlaxoSmithKline
Searching out growth
On the other hand, many growth investors are anything but conservative. Often taking big chances by investing in companies early on, before they've had an opportunity to prove themselves, growth investors suffer a lot of big losses. But when they hit big -- as they have on stocks like Amazon.com
The problem, though, is that growth stocks like Amazon and Google don't provide any income to their investors. In order to generate cash, you have to go out and sell shares. Discount brokers have made it far easier to sell shares in a cost-effective manner, so that's not as big a deal as it used to be -- but it's still inconvenient to have to make a transaction and create a taxable event just to get some spending cash from your portfolio.
Have your cake and eat it, too
Is there a way for you to get the best of both worlds -- solid income as well as potential growth? I went looking for companies that offer both past and future earnings growth, along with healthy current yields and a history of raising dividends over time. Here are some of the stocks I came up with:
|
Stock |
Current Yield |
5-Year Dividend Growth Rate |
3-Year Past EPS Growth |
5-Year Est. EPS Growth |
|---|---|---|---|---|
|
Abbott Labs |
3.1% |
8% |
37% |
10.8% |
|
Colgate-Palmolive |
2.3% |
12% |
17.4% |
9.8% |
|
Hasbro |
2.9% |
32% |
16.7% |
9% |
|
Hudson City Bancorp |
4.6% |
19% |
24.5% |
16.4% |
|
Nokia |
4% |
17% |
20.4% |
10% |
Sources: Yahoo! Finance, Motley Fool CAPS, DividendInvestor.com. As of Nov. 4.
As you can see, stocks like this do exist. Most of the ones above are well-known names, but others that meet the test more closely resemble Google-like growth stocks that you're less familiar with.
Yet out of all the methods you can use to invest, choosing dividend stocks whose businesses are still growing gives you the most tangible evidence that your shares' value should rise over time. If past dividend increases continue into the future, you'll get an ever-rising stream of income, which other investors will value highly. Rapid growth will support higher dividends. It'll also leave the company with the flexibility to pursue other strategies, such as reinvesting money to grow its internal business, or making offers to buy out competitors.
Look for income and growth
Too often, investors think that certain methods are an either/or proposition. But by combining commonly used investing strategies, you can often mix and match the characteristics you find most desirable, and find stocks that give you everything you want.
