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One 7% dividend stock and one growth stock I’d buy today

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Finding the right balance between a high dividend yield and strong dividend growth is never easy.

The two companies I’m looking at today reflect this dilemma. One offers a super-high 7.6% yield, but appears to have limited growth potential. The other yields less than 3.5%, but has doubled its profits in the last four years.

A growth business

More and more of us are living in rented or shared accommodation, driving strong demand for self-storage. Market-leader Big Yellow Group (LSE: BYG) said today that its adjusted pre-tax profits rose by 12% to £61.4m during the year to 31 March. Sales rose by 7% to £116.7m over the same period.

When profits rise faster than sales, it usually means that profit margins are increasing. One reason for this that occupancy rose from 78% to 81% last year, despite the firm adding new stores. The costs of operating a store are mostly fixed, regardless of how full it is. So increasing occupancy can give a big lift to profits.

In today’s results, executive chairman Nicholas Vetch confirmed that “higher levels of occupancy deliver more traction on pricing.” The company is targeting occupancy of 90%. Although it’s still some way from reaching this goal, I’m encouraged by the progress made last year.

More growth to come

Profits should keep rising if occupancy improves. But Mr Vetch is also targeting “the next phase of growth” and hopes to continue opening new stores around the UK to add to the company’s existing estate of 74 stores.

Ten development sites are already in the pipeline, and three have planning consent. The group also has a 20% stake in the Armadillo Self Storage group, which operates 22 stores.

Big Yellow’s share price has risen by 130% over the last five years. Analysts expect earnings to rise by about 8% to 41.8p per share this year, putting the stock on a forecast P/E of 23.

That might seem expensive, but the forecast yield of 3.5% and price/book value ratio of 1.4 seem about right to me for a growth business of this kind. I believe the shares could still be worth buying.

Give me a 7% yield today

If you want your dividend income upfront, then you may be interested in a different type of property stock. Shares in housebuilder and construction group Galliford Try (LSE: GFRD) currently offer a forecast yield of 7.7%.

The group launched a surprise £150m rights issue in March. This was used to help strengthen its balance sheet and fund an estimated £30m-£40m of extra cash costs on a £550m road-building project with failed firm Carillion.

A trading statement today suggests that these costs may now be slightly higher than expected, due to weather disruption. But Galliford’s other main division, Linden Homes, is still performing well. It’s delivered completions and forward orders worth £1,183m so far this year, compared to £1,176m during the same period last year.

A contrarian buy?

Chief executive Peter Truscott said that full-year results should be in line with market expectations this year. But his firm’s shares trade on just 6.7 times forecast earnings and offer a prospective yield of 7.6%.

This valuation suggests to me that investors don’t expect Galliford’s profits or dividends to be sustainable. This investment isn’t without risk, but if the firm can stay on track then I think the shares could deliver attractive returns over the next year or two.

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Roland Head has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.