Do you invest for growth or income? Can FTSE 100 investors enjoy the best of both worlds and combine income and growth? Here are five companies that offer income and growth.
There is a short answer to the question, can FTSE investors combine income and growth? And that is that it depends on your time horizon and what you want to achieve?
An obvious tactic that FTSE income investors might apply is to invest in top dividend-paying companies. But it is just as important to ask whether you think that company will be a good dividend payer throughout your entire investment horizon.
Let's say you want your investment horizon to pay out an income over 20 years. Of course, none of us knows what the world will be like in 20 years, but I especially worry about the longevity of certain well known, high dividend-paying companies.
Tobacco firms pay good dividends, but for how long?
Take the tobacco firms: the dividend yield on Imperial Brands is currently 8.89 per cent. For British American Tobacco, it is 7.79 per cent. But how long will these companies be around? Will consumers react against smoking to the extent that long before the twenty-year time horizon is up, the tobacco firms will be significantly reduced in size — if indeed they are still with us.
Imagine you had bought shares in British American Tobacco in 2017 when shares were roughly twice today's level. Your dividend yield based on what you paid for the shares would be around four per cent — still not bad, but nothing like the yield a new investor in the company will enjoy.
One could make the same argument for oil companies — for so long, BP and Royal Dutch Shell were the bedrocks of most pension schemes — but for how long can we expect dividends yields to remain attractive?
Contrast tobacco with consumer goods
On the other hand, if you had invested in Unilever in 2017, your dividend yield based on what you paid for the shares would be roughly the same. If you had bought Unilever shares in 2013, the dividend yield relative to what you paid for the shares would be 7.5 per cent.
If you had invested £100 in Unilever in 2005, your annual dividends would be around £15.
That is why your time frame matters.
Five good dividend payers with good growth potential
As it happens, I do like Unilever, in part because I like the way the company has embraced digital technologies. In addition, I think it is a reasonable growth stock that pays a decent dividend of around 3.7 per cent, but which is likely to see dividend yield increase over time.
Another potentially good income stock is Lloyds Bank. Its record as an income stock has not been so good since the 2008 crash and banking bailout. However, many analysts believe companies with high exposure to the UK economy are well placed for share price growth — the rationale here is that the markets are underestimating the likely strength of the UK economic recovery post-Covid. If that view is correct, then it is hard to think of a better example of a company that traditionally pays good dividends and which may benefit from a post-boom economic in the UK than Lloyds.
Other good dividend payers are some of the housebuilders, take Persimmon, for example. Dividends took a big knock in 2020, but the 2019 dividends give a good idea of the underlying picture. The 2019 dividends were around eight per cent of the current share price. Furthermore, shares have performed well over time — with shares up around 70 per cent over the last five years, five-fold over ten years, and have even doubled since the 2008 peak.
Another sector with good growth potential is pharmaceuticals. For years the sector has been plagued by the slow development of new drugs — but we only need to observe how rapidly Covid vaccines were developed to imagine how this could change.
Gene editing technologies such as CRISPR are likely to create a revolution in pharmaceuticals.
The GSK share price has disappointed for some time. But it already boasts a sold dividend yield of around 5.7 per cent; I think the company is well-positioned to benefit from a period of rapid drug discovery.
I would say ditto for AstraZeneca. Its share price is up around 70 per cent over the last five years, yield is less than three per cent, but an investor who bought in during 2016 would be enjoying a yield of around four per cent. An investor who had bought into the company in 2014, just before Pfizer tried to buy the company, would now be enjoying a five per cent plus yield, and an investor who bought shares in AstraZeneca in 2005 would now be enjoying a yield approaching ten per cent.
An honourable mention
So that is five good FTSE dividend payers with growth potential: Unilever, Lloyds Bank, Persimmon, GSK and AstraZeneca.
My only concern with the above list is that Lloyds and Persimmon both have high exposure to the UK property market and GSK and AstraZeneca to pharmaceuticals.
So I would like to add one more company, call it my sixth stock or honourable mention.
The company in question is a reasonable dividend payer — 3.98 per cent yield, but shares have doubled over five years. The company in question provides good diversification, offering minimal correlation with the other stocks I referred to above. It is a miner, one of the biggest in the world, the company in question is BHP.
With these companies, the FTSE investor will get good dividends, the prospect of growth and diversification, thereby limiting risk.
Not Investment Advice
Note: Views expressed are those of the writer. The author does not own any stocks mentioned. The article is information, not advice. Share prices can rise and fall. Past returns are not a guide to the future. Please do your own research.