It can be tempting to park surplus funds in a Cash ISA, especially when starting out on the investing journey. Not only is it a convenient way to earn a passive income, its tax free too. But the interest rates available are so low right now, I’m not sure if the benefits are big enough to make up for such small returns.
Balancing growth and dividends
I’d much rather invest my first £500 in quality stocks. There are plenty of these in the FTSE 100 set. Ideally, these would be stocks that offer a good mix of rising share price and healthy dividend yield. To me that’s a much better way of getting started than chasing either capital appreciation or income generation only, while I’m still trying to figure out what investing strategy works best for me.
There’s an inherent catch to balancing growth and income, though. A high-growth stock will see a decline in dividend yield overtime (if dividend amounts stay unchanged) as the share price rises. The reverse is also true. Stocks with growing dividend yields are often those whose prices are falling. But there are a few shares that have managed the fine balance between growth and income.
Healthy stock price growth
One of these is the FTSE 100 pharmaceuticals and healthcare provider GlaxoSmithKline (LSE:GSK), whose share price has risen by a healthy 32% since the first time I wrote about it a year ago. It does bear mentioning that it isn’t the best-performing growth stock, however. Consider JD Sports Fashion, another FTSE 100 company, whose share price almost doubled over the past year.
However, GSK still has an edge because of its dividend yield of 5%. Not only is this higher than the FTSE 100 average yield of around 4.3%, its way better than JD’s yield, which has been at sub-1% levels for the past four years.
Higher than average dividend yield
This isn’t to say that GSK offers the best yield in the FTSE 100 set, far from it. Consider the example of the tobacco biggie Imperial Brands. It has double the dividend yield that GSK does. But here’s the catch. IMB’s share price has been falling overtime, while GSK’s has been rising.
Even if the two shares started with the same yield, just by virtue of diverging trends in the share price, IMB’s yield would look better right now. Of course, if I was an investor looking purely for income, I’d much rather consider IMB. But if I would like the option of re-allocating my investments to different stocks or a different asset class altogether or a combination of both, I’d much rather be holding GSK.
Safe haven for uncertain times
GSK’s relatively lower volatility than IMB’s is another one of its advantages. As is to be expected from a defensive stock, its price fluctuates less during times of economic uncertainty or downturns than a cyclical stock’s does. Since the economy isn’t at its best right now, it’s a safer option to stick to defensives when starting out. I’d go for GSK.
Manika Premsingh has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended GlaxoSmithKline. The Motley Fool UK has recommended Imperial Brands. 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.