Investing in growth stocks often means going without a useful dividend yield. I’m not always keen on this. I believe dividends are a good discipline for company management and a useful measure of cash generation, even in a growth situation.
To satisfy my craving for growth and income, I’ve hunted through the market and found two stocks with growth ratings and yields of more than 3%.
Investing in tracking
Not all drivers are keen on having a black box in their car tracking their behaviour. But telematics are increasingly a fact of life, especially in the fleet sector.
One company that’s positioned to profit from this trend is telematics supplier Quartix Holdings (LSE: QTX). This £177m firm is focused on supplying tracking technology to the fleet sector, but is also expanding into the insurance sector, when it can do so without sacrificing margins.
Figures released today show that sales rose by 5% to £24.5m in 2017, while pre-tax profit rose by 1% to £6.6m. These modest gains were largely the result of more selective bidding for insurance work. The total dividend was increased by 20% to 13.5p, supported by a higher cash balance of £7.3m.
International growth could explode
The number of vehicles under subscription rose by 20% to 105,314 units last year, but a 23% increase in fleet installations was partially offset by a 17% decline in insurance installations.
Most of this volume growth was in the UK, but Quartix is also expanding fast in France and the USA. Vehicles under subscription rose by 32% to 13,131 in France last year, while the equivalent figure rose by 45% to 8,973 in the USA.
As the company already has more than 80,000 vehicles under subscription in the UK, I’d imagine that the potential market in the USA is many times this size. I believe overseas growth could transform this business over the next few years.
Looking ahead, the stock trades on a forecast P/E of 29 with a prospective yield of 3.5%. I believe Quartix remains a decent long-term growth opportunity.
Invest in younger customers
Young drivers are helping to fuel the growth of telematics-based insurance. Younger customers are also a key part of the growth story for my next stock, hostel-booking service Hostelworld Group (LSE: HSW).
Modern hostels are increasingly popular with young travellers who like their affordable rates, central locations and well-equipped communal spaces. Shares in this £366m firm have risen by 72% over the last year.
Hostelworld confirmed in January that its 2017 results should be in line with expectations. Based on broker consensus forecasts, this means that sales will have risen by around 10% to €87m, while adjusted earnings will have risen by around 5% to €0.21 per share.
This may seem relatively modest growth for a company which trades on a forecast P/E of 20. However, Hostelworld is expanding into the Asian market, where bookings rose by 18% during the first half of last year. This region should make a bigger contribution to earnings going forward.
Another attraction is the group’s dividend policy, which is to pay out 75% of adjusted earnings each year. Strong cash generation has made this policy both affordable and sustainable and the forecast yield has now risen to 3.7%.
In my view, Hostelworld could be a great buy for long-term income and growth.
A growth stock with 200% upside?
Quartix and Hostelworld look like good quality growth stocks to me, but they're not currently expected to deliver the kind of double-digit earnings growth needed to generate 100%+ returns.
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Roland Head has no position in any of the shares mentioned. The Motley Fool UK has recommended Quartix. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.