Often, I can get a bit narrow-minded in my pursuit for the best stocks to buy now. I can sometimes think about simply looking for the highest potential growth stocks. Or I can try and eek out the most lucrative dividend yields for income. In reality, there exists a middle ground where I can buy stocks that offer me both income and growth. Here’s how I’d try to find them.
How to find the best of both worlds
There are two ways that I’m using to pick the stocks. For growth companies, I think the best way is to simply look at the historical share price return. I can set a minimum threshold return (e.g., 10% per year) and then back date the returns.
Some might prefer to look at stocks that have high price-to-earnings ratios, as this could show that investors are placing a high value on the potential for future earnings to grow. Yet a high ratio could also include stocks that are overvalued at the moment. This could get me confused when trying to find the best stocks to buy now.
For income, I think the best filter is looking at the dividend yield. This provides a percentage yield based on the current share price and the dividend per share. If I just look for stocks with a high dividend per share, this doesn’t tell the whole story. A high dividend per share might actually be a low dividend yield if the share price is also a large number.
Bringing them both together, I can then discount stocks that don’t meet both criteria. What I’ll have left are stocks that have given strong historical share price returns, with an attractive current dividend yield.
Reasons to buy the best stocks now
There are several benefits of buying the top stocks that offer income and growth options.
Firstly, the income part allows me to still make use of the stock even if we see a stock market crash or even just a correction. For example, let’s say I buy a stock with a dividend yield of 6%. Two years down the line, the share price might have unfortunately fallen by 10%. Yet thanks to receiving the income for two years, I could technically sell the stock and still have a profit overall.
The other side of the equation is also valid. A company might decide to really pursue and invest in growth. To put more expenditure into growth, it decides to cut the dividend. Even though my income will drop, manifestation of the growth should see the share price rally. This should more than make up for the income drop.
The above shows how the some of the best stocks to buy now are actually dual-purpose. Clearly, the pool to choose from is slim. My estimations are for around half a dozen FTSE 100 stocks that fit this bill. Another risk is that to fulfill both goals, I end up not getting the best of either field.
Ultimately, as an investment strategy I think there is definite merit in buying stocks that serve multiple purposes.
