Great growth companies, bought early at cheap prices are highly prized by most investors, many of whom will go to great lengths to find the next ‘multibagger’. But while the search for top quality earnings growth and market-beating performances usually means focusing on exciting smaller stocks that look set to soar, it’s also possible to outperform the market by blending these hallmarks with something that many growth investors might consider (quite wrongly) to be ‘boring’ - dividend income.
On paper, the combination of growth and income aren’t easy bedfellows. Most growth investors are more than happy (indeed expect) to see their companies ploughing all available cash resources into growing further and faster rather than hiving off a proportion to their shareholders. But according to American share analyst Kevin Matras, screening the market for companies with quality growth credentials that still offer above average yields makes a whole lot of sense.
Background to Winning Growth & Income
As Vice President at investment research company Zacks Investment Research, Matras is known in the US for screening strategies that focus on earnings growth. In his book Finding #1 Stocks: Screening, Backtesting and Time-Proven Strategies, he suggests a growth and income screen for those investors that are “looking for good companies with solid revenues that pay a good dividend”. Naturally, this kind of approach can shift the focus away from smaller shares, which are much more capable of spectacular growth rates, towards larger cap companies that have begun rewarding shareholders with dividend payouts. He notes that these larger stocks can often be great companies generating huge amounts of cash but have nonetheless moved beyond the growth opportunities they once had.
Investing criteria
To find them Matras uses a screening tool that tracks earnings revisions by analysts and, in this case, looks for stocks that are rated Strong Buys, Buys and Holds. This is simple enough to replicate in the UK market, as are some of his other screening metrics. At Stockopedia we track a screen that’s inspired by Matras’s search for growth and income but which is more appropriate to the shares available to buy in the UK.
It begins by looking for companies where brokers have recently been upgrading their forecasts for the next financial year. It then looks for a few ‘quality’ criteria, such as above average return on equity (signalling that the company is good at generating cash);…
