Generally, a Growth and Income company will have healthy balance sheets, consistent dividend payments, quality products and services and experienced management teams. Usually Growth and Income companies are industry leaders, displaying steady earnings growth.
Unlike most compromises, this one actually works. Generally income investors end up focusing on older, more established firms, which have reached a certain size and are no longer able to sustain higher levels of growth. These companies generally no longer are in rapidly expanding industries and so instead of reinvesting retained earnings into themselves (as many high-flying growth companies do), mature firms tend to pay out retained earnings as dividends as a way to provide a return to their shareholders.
Income investing is not simply about investing in companies with the highest dividends (in dollar figures). The more important gauge is the dividend yield, calculated by dividing the annual dividend per share by the share price. This measures the actual return that a dividend gives the owner of the stock. For example, a company with a share price of $100 and a dividend of $6 per share has a 6% dividend yield, or 6% return from dividends. The average dividend yield for companies in the S&P 500 is 2-3%.
Another factor to consider with the dividend yield is a company’s past dividend policy. Income investors must determine whether a prospective company can continue with its dividends. The longer the company has been paying a good dividend, the more likely it will continue to do so in the future. Companies that have had steady dividends over the past five, 10, 15, or even 50 years are likely to continue the trend.
Pros: A single investment in a big winner can make you rich. Timing your investment in a growth stock is not critically important if you can buy it early enough in the growth phase as invariably a poorly timed purchase can be salvaged by meteoric growth for a sustained period of time. They consistently beat earnings estimates and their stock prices are generally on a staircase like uptrend.
Cons: There are never dividends paid by these companies in their early fast growth stages. You generally are going to pay a high multiple of earnings and feel like you are overpaying. They are rarely cheap. When the growth prospects diminish, and they inevitably do, these stocks take a brutal hit.
An excerpt of “The Investment Survival Guide”