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Which are the best shares to buy now, growth or dividend shares?

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I reckon it’s a brilliant time to start buying shares right now, while the stock market crash is throwing up so many cheap ones. But to reap the biggest benefits, you need to have a long-term strategy. Typically, investors are split into two camps. Some seek share price growth, while others seek income from dividends.

Generalising a bit, dividend investors are often seen as preferring safety, while growth investors are prepared for a bit more risk. Me, I’m happy to take the cash whichever way it comes.

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Breaking it down into growth and dividend stocks can help narrow down the bewildering array of choices out there. And it can help you focus on the measures you’re happiest with. I’m going to pick five of each from the FTSE 100, based on two simple measures.

Top dividend shares

For dividend shares, I’m just looking at forecast yield. That’s the expected dividend expressed as a percentage of the share price. So a share priced at 100p paying a 5p dividend yields 5%. I’m basing this on the forecasts for next year, not the current year, to try to look as far past the Covid-19 crisis as possible. Such forecasts will be very uncertain now, but will be partly based on long-term trends, so I think it’s a useful exercise. These are the five biggest dividend yields in the FTSE 100 (though it will vary depending on which forecasts you use and how share prices change)…

Company Forecast yield
Imperial Brands 10.1%
Legal & General 9.5%
Polymetal International 8.5%
Aviva 8.4%
BP 8.4%

Others hovering just outside the top five include Persimmon (7.8%), Vodafone (7.5%), and HSBC (7.5%). So there’s a nicely diversified dividend selection available. And I reckon there’s growth potential in some of these too.

The dividend yield does not tell the whole story, and I’ll examine dividend selection criteria in more detail in a later article. But this should be enough to get you started thinking about dividend investing.

Top growth shares

For my growth share selection, I’m using a measure called the price-to-earnings-growth (PEG) ratio. It’s something that compares the current valuation of a share with its forecast earnings growth. And a lower number is better, providing it’s positive. I think it’s vital to keep valuation in mind when looking for growth shares rather than just earnings growth. Without that, we can get sucked into share prices being pushed to silly levels, and suffer big losses when the bubble bursts.

Now, because many companies are expecting a big earnings drop this year followed by a quick recovery next, there are lots of FTSE 100 shares with very low PEG ratios. In this list I’ve just selected five of the very lowest, picking from five different sectors. I’ve also included P/E multiples for a bit of extra information. Some of them pay decent dividends too.

Company P/E PEG
HSBC 9.1 0.1
Glencore 13.2 0.1
Taylor Wimpey 9.9 0.1
Next 16.3 0.2
Associated British Foods 15.6 0.3

I’ll examine growth investing further in a later article, where I’ll cover some pitfalls of using the PEG ratio and some types of companies it doesn’t work well for. But for now, we at least have a small selection whose forecast growth makes them look promising. And the way HSBC has shown up in both lists is intriguing.

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Alan Oscroft owns shares of Aviva and Persimmon. The Motley Fool UK owns shares of Next. The Motley Fool UK has recommended Associated British Foods, HSBC Holdings, and 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.

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