Those new to the market often feel the need to attach themselves to one (and only one) strategy from the off, labelling themselves as either growth or dividend investors in the process.
While understandable, this kind of black and white thinking is arguably restrictive. There are, after all, many stocks that offer both the possibility of capital gains as well as a reliable income stream.
Here are two examples from the FTSE 100, one of which provided another encouraging update to investors this morning.
Rising revenue
Compared to some of its index peers, food and support services provider Compass (LSE: CPG) rarely hits the headlines. Today’s trading update — released to coincide with its Annual General Meeting — is unlikely to change things. That said, it should provide owners with the reassurance to stay invested.
Organic revenue for the final three months of 2019 rose by 5.3% with a strong performance in North America making up for a sticky patch in Europe (partly due, the company stated, to “a less favourable Sports & Leisure calendar”). Revenue from the company’s operations from the rest of the world — including markets such as Australia — also climbed 4.7%.
Based on these numbers, the Chertsey-based business made no change to its outlook for 2020, stating that “organic growth around the mid-point of our 4-6% guidance range” was still expected.
Worth the cost
Shares in Compass are up almost 75% over the last five years compared to the 9% achieved by the FTSE 100. The total gain will be even higher once dividends are taken into account.
Unsurprisingly, the stock now trades at an expensive valuation (22 times forecast earnings) relative to the index in which it features. Nevertheless, I think it can be justified.
Earnings per share growth of around 7% is predicted in FY21, bringing the valuation down to 20. Once bedded-in, the recently-acquired, Nordic-focused Fazer Food Services should also help bump profits higher.
And Compass’s income credentials? Some might baulk at the relatively low 2.2% yield, but it’s worth highlighting that the firm has an excellent record of lifting its annual payouts.
Assuming it continues to do so in the years ahead, those buying now with the intention of holding for many years can expect to generate a much higher yield on their original investment as the value of the company also increases.
Another hiker
Luxury brand Burberry (LSE: BRBY) is another example, at least in my view, of a company offering its investors a tempting mix of both growth and income.
Although fears surrounding the spread of the coronavirus could temporarily hit earnings in the short term, this is a business that is likely to benefit hugely from the rise of wealth in emerging markets whose populations covet Western brands.
Like Compass, Burberry is far from being the biggest dividend payer in the FTSE 100, yielding ‘just’ 2.2% at the current share price. Again, however, it ticks the box for consistently increasing its cash returns with another, near-9% increase expected in FY21. Personally, I’d much rather own a company distributing an adequate but rising dividend (and reinvesting the majority of its profits back into the business to generate great returns — which Burberry does) than one with limited growth prospects and a sky-high yield it can barely afford.
Burberry’s shares currently trade on 23 times earnings. Taking the above into account, I think that’s a price worth paying.
