When you think of growth profit plays you do not ordinarily think they could also make for solid dividend-paying stocks as well.
Growth stocks are high-flying market darlings with some exciting new product or service that is driving spectacular earnings growth.
Dividend-paying stocks are typically more established companies with a decent business, but instead of putting cash into reinvestment opportunities they return it to shareholders.
But if you change the way you think about these kinds of stocks, you can add yield and growth to your portfolio with just one stock pick...
You see, over the years I have developed and tested a theory for finding what I consider "true growth stocks."
Let me explain...
Finding Dividend-Payers in True Growth
My theory starts with the fact that earnings per share are the most widely watched measure on Wall Street and growth in EPS is generally used to determine growth rates.
But this is not the number to use.
As we learned from companies like Enron and WorldCom, EPS is a very easily manipulated number.
We regularly see many companies use financial engineering methods like buybacks to manufacture EPS growth. Reported earnings can be almost anything the CFO wants them to be and are a poor measure of corporate growth.
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A true growth company is one where the total value of the company is growing every year at a high rate. Rather than rely on the income statement, I prefer to use the balance sheet and measure the growth in book value per share.
A high growth in the net worth of the company means that management is reinvesting profits successfully and that research and development, as well as capital expenditures, are providing real growth. As the assets and net worth of the company grow, you then want to see that the amount of cash being produced by the company is also growing at a high rate.
By redefining growth as growth of the value of the company and cash produced, instead of just accounting earnings per share, investors can find companies that may be ignored by Wall Street but have the potential for outstanding long-term returns. As a bonus, some of them provide comfortable dividend yields and can even be used in an income portfolio.
When I look for my true growth stocks today, I am able to find a few that also provide attractive dividend yields. Here are a couple...
Dividend-Paying Stocks With "True Growth"
One of the highest-yielding companies on the list is Intersections Inc. (Nasdaq: INTX) a company that provides subscription-based consumer protection services.
They offer identity theft protection plans, credit monitoring and online brand protection. As online fraud and identity theft continue to be a growing problem for consumers and businesses, the company should be able to maintain a high rate of growth. Over the last decade the book value per share has grown by 22% annually, while cash flows have averaged about 17% annual growth.
Essentially controlled by the Loeb family, the company has chosen to pay out a large portion of the annual sales and profits in the form of dividends. At the current price the shares are yielding 8.28%. Insiders own about 50% of the company, so management has a vested interest in growing the business and maintaining the dividend payout.
My second true-growth dividend-paying stock: Universal Insurance Holdings Inc. (NYSE: UVE).
Universal Insurance Holdings is in a pretty basic business; it sells homeowners insurance primarily in the state of Florida.
Universal Insurance Holdings recently received license to operate in North Carolina, South Carolina, Hawaii, Georgia, Massachusetts and Maryland, and will be expanding into those states. It has a subsidiary, Platinum Property and Casualty Insurance, which writes homeowners coverage for Florida homes worth $1 million and up.
This is not the most exciting company in the world - until you look at the long-term growth rates of the business. Book value has grown by almost 20% a year, and thanks to expansion programs and solid underwriting experience, cash flow has been growing by more than 50% a year for the past decade. Growth should remain strong with the company's expansion into new states, and at the current price the stock yields a healthy 4%.
Universal may not have a sexy new product that makes headlines, but it does have good management that knows how to grow the value of the company and produce higher amounts of cash year after year.
Since income is key to any portfolio, don't miss more of the best dividend-paying stocks to buy now... here are three we love.