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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.
Editor's Note: What if there was a way to collect 10, 14, or 35 years of income in a single day? Companies regularly hand these out to people "on record" under the guise of dividends. These single-day payouts can reach well into six digits. Go here to learn more.
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.
About the Author
Tim Melvin is an unlikely investment expert by any measure. Raised in the "projects" of Baltimore by a single mother, he never attended college and started out as a door-to-door vacuum salesman. But he knew the real money was in the stock market, so he set sights on investing - and by sheer force of determination, he eventually became a financial advisor to millionaires. Today, after 30 years of managing money for some of the wealthiest people in the world, he draws on his experience to help investors find "unreasonably good" bargain stocks, multiply profits, and build their nest eggs. Tim tirelessly works to find overlooked "hidden gems" in the stock market, drawing on the research of legendary investors like Benjamin Graham, Walter Schloss, and Marty Whitman. He has written and lectured extensively on the markets, with work appearing on Benzinga, Real Money, Daily Speculations, and more. He has published several books in the "Little Book of" Investment Series and a "Junior Chamber Course" geared towards young adults that teaches Graham's principles and techniques to a new generation of investors. Today, he serves as the Special Situations Strategist at Money Morning and the editor of "Max Wealth" and Heatseekers.