Interactive Investor

Nine growth stocks with solid dividend records

23rd September 2021 10:24

Ben Hobson from Stockopedia

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Here are nine growth stocks investors should consider if they are also seeking reliable dividends.

When it comes to different investment strategies, ‘fast growth’ and ‘dividend income’ don’t usually fit together that well.

For growth investors, accelerating sales and profits tend to take priority when picking stocks. But this overlooks the fact that a dividend track record can reveal a lot about a company’s growth, resilience and progressive approach to rewarding shareholders.

Jim Slater, the famous British growth investor, wrote in his 1992 book The Zulu Principle, that he preferred companies that pay a dividend.

He explained: “...the dividend payment and forecast (if any) to some extent corroborate the management's confidence in the future. The ideal company will have a steadily increasing dividend growing broadly in line with earnings.”

What Slater was saying was that the dividend is a useful extra way of understanding whether a company’s growth is likely to continue. Yet many growth investing strategies see dividends as a negative.

Indeed, one conventional view of companies that pay dividends is that they’ve simply run out of ideas. They don’t know how to grow any further and may have even gone ex-growth.

More generally, there’s an assumption by growth investors that dividend paying stocks actually deliver lower portfolio returns. But none of this is necessarily true. Research has shown that higher yielding stocks actually deliver superior portfolio returns over time.

Over the past 18 months, the dividend landscape has changed dramatically. Faced with the uncertainty created by Covid, many companies were quick to shore up their finances. Dividends were cut right across the market, and they’ve only recently started to recover.

Against this backdrop, investors looking for dependable growth plays that are on a solid financial footing might do well to consider dividend track records.

Classically, so-called dividend achievers are stocks that have consistently grown their payouts for 10 years or more. In the UK, that kind of history can be hard to come by, but a focus on the longest possible growth record is still worth a look.

This week’s screen takes the ‘dividend achievers’ approach by looking for long-term dividend growth in companies with accelerating earnings, low debt to assets and good stock liquidity. Essentially, these tend to be found in higher-quality, well-financed businesses.

A model of this approach tracked by Stockopedia has produced a 30.6% return over the past year (before dividends and costs). Here are some of the companies that currently pass the rules:

Name

Div Gwth Streak (years)

Yield (%)

DPS Gwth % (last year)

EPS 5y growth rate (%)

Industry group

Impax Asset Management (LSE:IPX)

9

0.9

79.3

28.4

Investment Services

Best of the Best (LSE:BOTB)

9

0.8

66.7

67.5

Entertainment Services

Jarvis Securities (LSE:JIM)

5

4.8

66.6

15.8

Investment Services

Tandem (LSE:TND)

9

1.5

45.0

20.3

Leisure Products

Gamma Communications (LSE:GAMA)

6

0.7

11.9

27.6

Telecommunications

Treatt (LSE:TET)

9

0.7

9.22

11.4

Food & Tobacco

Bioventix (LSE:BVXP)

9

2.5

7.95

18.2

Biotechnology

Focusrite (LSE:TUNE)

5

0.3

4.76

18.1

Electronics

Fevertree Drinks (LSE:FEVR)

6

0.7

3.27

25.5

Beverages

Part of the appeal of this strategy is that it picks up companies with a consistently strong earnings growth record. Often these firms are slightly smaller than the large-caps that tend to dominate the dividend landscape.

And while the yields are fairly low in places, the dividend growth record of these shares will attract investors looking for stocks that are growing their payouts in step with earnings.

Generally, shares passing these rules tend to be consistently profitable, but their small size is worth watching.

Smaller companies are not immune from having to make dividend cuts - and careful research is always important - but in the hunt for growth stock ideas it’s worth paying attention to the dividend track record.

About Stockopedia

Stockopedia helps individual investors beat the stock market by providing stock rankings, screening tools, portfolio analytics and premium editorial. The service takes an evidence-based approach to investing, and uses the principles of factor investing and behavioural finance to help investors make better decisions. Stockopedia is rated Excellent on Trustpilot and was named Best Research Service and Best Investment Tools Provider at the 2021 UK Investment Magazine awards.

Interactive Investor readers can get a free 14-day trial of Stockopedia here.

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

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