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These Dividend Stocks Offer the Best of Both Worlds—Both Growth and Big Yields

I want to let you in on a little secret: You really can enjoy the best of both worlds.

With a little bit of digging, you can uncover companies that not only offer growth but pay good dividends as well.

Now admittedly, there has always been something of a perceived conflict between the two.

The classic theory has been that real growth companies need to retain all of their earnings to have the capital to expand, whereas high-paying dividend stocks are simply "too mature" to be considered good growth opportunities.

But here's the thing. This well-worn theory is wrong on both counts.

In fact, the best companies to put in your nest egg are often what I call "heirloom" investments.

Heirloom investments are companies which have not only maintained their dividends for 30 years or more– but have increased them every step of the way.

For investors, it's like getting growth and dividends all rolled into one.

Take Emerson Electric Co. (NYSE:EMR) for example.

This heirloom investment has increased its dividend every year since 1957. They haven't been trivial increases, either.
If you look at Emerson's dividend record over the last 20 years, you will find that its quarterly dividend has risen from 8.62 cents in the third quarter of 1992 to 40 cents today.

That's a compounded growth rate of 8.0%, far above the average 2.5% consumer price inflation rate during this same 20-year period.

Granted, it may not sound like much in a single year–but over a 20-year period it's the kind of difference great fortunes are made of.

Add Emerson's annual dividend growth rate of 8.0% to its dividend yield of 3.1% and you get an annual return of 11.1%. Over 20 years, that will turn every $100 invested into $820.83.
That's the difference between a cheese-paring retirement and living your golden years in style.

Dividend Stocks: How to Uncover the Best of Both Worlds

Of course, some sectors are much better than others in giving you both dividends and growth.

The tech sector, for example, is so determined to reward every employee with bountiful grants of stock options that they generally forget to pay dividends altogether.

Indeed, when companies like Microsoft Corp. (Nasdaq: MSFT) and Apple Inc. (NYSE:AAPL) decide to distribute some of their tens of billions of dollars in cash to their unfortunate shareholders, it's generally a sign that they have gone ex-growth and are running out of new ideas.

And yes, I would include Apple's new dividend generosity, taking its yield up to a bountiful 1.6%, in that criticism.
Then there are companies forced to pay out essentially all their earnings in dividends, such as real estate investment trusts (REITs) and master limited partnerships (MLPs).

Generally, these companies are in stable asset-rich businesses, so they can only grow by acquiring new capital, thereby diluting exiting shareholders.

Still, in the case of some REITs like Omega Healthcare Investors (NYSE:OHI) the company's leases have an inflation-protection clause built in, so your nominal yield–in this case 7%– is better than it looks since the dividends tend to rise with inflation.

As for the financial sector, it used to pay good dividends, but these days they are much harder to come by. The combination of the 2008 financial crisis and the greed of its managers' with stock options has made them both less reliable growth opportunities and less generous dividend payers.

In any case, banks also have the opposite problems compared to the REIT discussed above: their assets are generally denominated in nominal dollars so their earnings can erode if inflation is too high.

For the best combination of growth and dividends, apart from a very few heirloom companies like Emerson Electric, you need to look for companies with a high return on capital and growth in their underlying business.

In this case it's important that the growth involved doesn't chew up too much of their capital.
One example is the oil drilling rig company SeaDrill Ltd. (NYSE:SDRL).

SeaDrill is based in Bermuda, which gives it an enormous earnings advantage. The company pays very little tax, since its headquarters is in a tax haven and most of its assets are located offshore.

Given the world's increasing need for energy, and the attractive economics of offshore drilling, SDRL has enjoyed rapid growth in recent years and looks likely to continue doing so.

With a 15.8% return on equity in its last fiscal year, the company's profitability is high. But it also pays a generous and increasing dividend, with a current yield of 8.2%.

So you see, you really can enjoy the best of both worlds when you combine a solid dividend stream with long-term growth prospects.

You just need to know where to look.

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  1. Dave Christie | September 10, 2012

    In your post today on Emerson Electric, while it may be a great company. I believe your math is misleading. A 3.1 % dividend with a grown rate of 8% will yield a next year dividend of 3.348 % not the 11% as mentioned.

    Regards Dave Christie

  2. Bruce Bundsen | September 11, 2012

    Martin might want to revisit his example of Emerson Electric. A yield of 3.1% with a dividend growth rate of 8% does not, I believe, result in an 11.1% annual return.

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