Investors often think income producing and growth stocks are in two different categories. That can indeed be the cause when a high growth company chooses to reinvest its earnings in the business instead of issuing a dividend to shareholders. On the other side, just because a company pays an attractive dividend does not mean it can't also generate attractive sales and profit growth.
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Having Your Cake ...
In today's 0% interest rate world, quality dividend paying stocks are more attractive than ever. Of course, a dividend doesn't mean much if it's coming from a business with poor future prospects. Even worse, an attractive dividend can often be a trap. Before the recession, dry bulk shipping companies like Eagle Bulk Shipping (Nasdaq:EGLE) started to yield over 10% as the equity sell off created an abnormal yield. Yet, such an "attractive" yield did not last long as liquidity issues forced Eagle to suspend the payout. Fast forward to today and Eagle shares trade for $1.60 and still pays no dividend. Four years ago, the annual dividend was more than today's current share price. The country's largest financial institutions, who for years were considered steady dividend payers, also lost that ability when global liquidity dried up in late 2008.
... and Eat it Too
Even so, there are plenty of businesses that give investors the best of both worlds in terms of income and growth. Defense giant Lockheed Martin (NYSE:LMT) currently trades for $88 and pays an annual dividend of $4 a share, good for a yield of 4.5% today. Over the years, Lockheed has been able to steadily increase its dividend payout as earnings have grown. Despite concerns that reduced defense spending will hurt future growth, such risks are likely to be short-term in nature. Look no further than the instability in Iran as a reason why the U.S. defense spending remains robust.
One company that is not going anywhere is Verizon (NYSE:VZ) and neither is the 5.2% dividend yield you get today. The company's crown jewel Verizon Wireless, jointly owned with Vodafone, will continue to grow as increased data usage from gadgets like the iPhone and iPad increase the average cellular bill. You can invest in a 10 year U.S. bond and get 2%, or pick up shares of Coca-Cola (NYSE:KO) and get a 3% yield plus own part of one of the best companies on the planet. Outside of the U.S., Coke consumption is still relatively low. While Coke's best days may be behind it, good days are still ahead. That means increased dividends as profits increase.
The Bottom Line
Income and growth often go hand and hand. Over the long run, it's almost always a combination of dividends and stock price appreciation that creates the greatest shareholder returns. Don't expect that to change anytime soon.
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At the time of writing, Sham Gad did not own shares in any of the companies mentioned in this article.