Growth and Income: Best of Both Worlds

Investors looking for income producing (dividends) stocks are well served by looking for both growth and income, i.e., companies with stable earnings growth that pay a solid dividend.

Oftentimes, these companies are more mature, larger-cap companies that no longer have the kinds of spectacular growth rates like some of the younger or smaller companies, or like they themselves had when they were younger and earlier in their growth cycle.

Many of these companies are generating huge amounts of cash, but because of their size, may not have the growth opportunities they once had.

The Law of Big Numbers

Consider this; an idea that generates $1 billion in profits for a $1 billion company represents a 100% growth rate. But that same $1 billion idea applied to a $10 billion company only represents a 10% growth rate.

In other words, it's much harder to move the needle on earnings the bigger the company gets. So, many of these companies will pay out a portion of their earnings to shareholders in the form of dividends.

The Income investor will want to look at a number of fundamental factors like the company's balance sheet, its competitive advantage, and its management but the most tangible proof that a company is worth holding for the long-term is earnings. You don't necessarily expect to see explosive growth, but you should look for steady and consistent growth over time. And a company that generates solid earnings growth is in a better position to raise its dividend over time as well.

When To Hold and When to Fold

Earnings estimate revisions are the cornerstone of the Zacks Rank. Whenever you find positive earnings revisions, you will generally find a company moving in the right direction, making it a perfect candidate for long-term ownership.

There may be fewer dividend paying stocks in the Zacks Rank #1 group, but there will be plenty of #2's, and you might even consider some #3's for the larger-cap companies.

And be sure to look for those with a favorable Growth Score as those are the ones that should significantly outperform the other income producing stocks. Those with a strong Value Score will also do well as research shows a correlation between dividends and value.

As you know, you'll typically have a longer holding period with a dividend paying stock. But a decline to a Zacks Rank #4 or #5 and a falling Style Score can be an early warning that business conditions are worsening and therefore that it is time to take profits and get out.