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)








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.