In part one of this series, I looked at secure dividend paying stocks that could form a solid, buy-and-hold backbone for any portfolio. In part two, I looked at the possibility of including double-digit high yield stocks in a portfolio and the risks that come with such a strategy. In this part, I am going to look at two growth stocks that offer lower yields than their peers but come with the possibility of capital growth as well as dividend payments.
Why growth stocks?
Growth stocks should be an essential part of a portfolio. While many investors consider growth stocks risky, there are in fact some relatively safe companies out there that are primed for growth, backed up with solid balance sheets, cash flows and dividend payouts.
Two such stocks are Verizon Communications Inc. (NYSE:VZ), and Cisco Systems, Inc. (NASDAQ:CSCO). Twocompanies with potential for growth but at the same time, solid balance sheets and reliable cash flows from operations.
Balance sheets and cash flows
| Verizon | Cisco | |
|---|---|---|
| Current ratio | 0.8 | 3.5 |
| Net debt (Cash) | $48.4 | ($32.4) |
| Net debt to EBIT | 3.5 | N/A |
| Interest cover | 4.8x | 18.2x |
Verizon Communications Inc. (NYSE:VZ)’s balance sheet is stronger than that of peer AT&T Inc. (NYSE:T), (which I covered in part 1) and while the company’s current ratio is low, it is similar to that of its peers in the telecoms sector and net debt is only three-and-a-half times earnings-before-interest and tax. Furthermore, the company’s interest costs are covered nearly five times over by earnings. Cisco Systems, Inc. (NASDAQ:CSCO), on the other hand, has one of the best balance sheets in the S&P 500. With a net cash position of $32.4 billion, the company has a current ratio of three-and-a-half times. Moreover, the interest on Cisco’s small amount of debt is easily covered 18 times over by earnings.
So overall, Verizon and Cisco Systems, Inc. (NASDAQ:CSCO) both have solid balance sheets to back up their future growth.
What about the lower Yield?
Cisco offers a dividend yield of 2.8%, while Verizon offers a yield of 3.9%, both lower than the yields offered by all the other companies I have talked about in the rest of this series. However, Verizon Communications Inc. (NYSE:VZ)’s and Cisco’s dividends are actually stronger than some of the companies that offer a higher payout, such as AT&T.
| Metric | AT&T | Verizon | Cisco |
|---|---|---|---|
| Operating cash flow | $38.9 | $31.5 | $11.5 |
| Investing cash flow | -$19.4 | -$20.5 | -$3.8 |
| Dividends | $10.2 | $5.2 | -$1.5 |
| Dividend cover by cash flow (operating-investing) | 1.9x | 2.2x | 5.1x |
| Free cash flow | $9.2 | $10.1 | $8.9 |
For example, AT&T’s dividend is only covered just under two times by operating cash flow, after the deduction of investing activities, while Verizon Communications Inc. (NYSE:VZ)’s is covered more than two times and using the same method, Cisco Systems, Inc. (NASDAQ:CSCO)’s payout is covered more than five times.
But why should you investing these growth stocks, what makes them appealing? Well, obviously, growth. While their peers are paying out large amounts of their profits to shareholders, these companies are re-investing for growth and this growth will translate into shareholder returns in the future through rising share prices.
Future growth
Here are the historic and predicted growth rates of these growth companies compared to the dividend dogs I analysed in the first article of this series.
| Company | Compounded 3yr revenue growth | Revenue 3yr CAGR | 3yr Share price growth |
|---|---|---|---|
| Verizon | 8.7% | 4.1% | 82% |
| Cisco | 15% | 7% | 0.3% |
| Urstadt Biddle Properties | 6% | 3% | 31% |
| AT&T | 2.5% | 1.2% | 46% |
Verizon Communications Inc. (NYSE:VZ) and Cisco have both grown much faster than Urstadt and AT&T, which both offer higher dividend yields. This rapid growth has translated into capital gains for Verizon’s shareholders but not for Cisco’s investors. However, after Cisco Systems, Inc. (NASDAQ:CSCO)’s most recent results and analysts predictions that the company will grow earnings-per-share by around 29% on average for this year, I believe the company’s shares are set for significant future capital growth.
Additionally, Verizon’s EPS are expected to grow 40% this year.
Conclusion
Overall, any portfolio should contain some stocks that offer the potential for growth as well as a solid dividend payout. Verizon Communications Inc. (NYSE:VZ) and Cisco Systems, Inc. (NASDAQ:CSCO) offer investors the potential for capital growth, backed up with a dividend yield that is above the market average and inflation.
Fool contributor Rupert Hargreaves has no position in any stocks mentioned. The Motley Fool recommends Cisco Systems (NASDAQ:CSCO).
The article Stocks for the Dividend Investor, Part 3: Growth and Income originally appeared on Fool.com.
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