Growth investors typically uses metrics such as sales and earnings growth in an effort to find stocks for capital appreciation purposes. On the other hand, dividend investors may be less concerned with capital growth, but more focused on stock traits such as dividend yield, dividend growth and sustainability of the payout. Investors can employ both strategies to boost overall portfolio returns.
Finding Growth Stocks
There are limitless ways in which investors can find growth stocks, but an easy place to start is by focusing on certain sectors. For example, sectors such as biotechnology, Internet and technology have historically been fertile ground for growth investors. On the other hand, consumer staples, telecommunications and utilities are examples of sectors that are not home to scores of growth names. Beyond sector selection, growth investors should consider using stock screeners to filter for those stocks that show above average sales and profit growth, among other traits. Oftentimes, a high price-to-earnings ratio can be a sign of a growth stock.
Dividend growth is far different than investing for growth. In the case of dividend growth, investors should be looking for stocks that have steadily rising payouts. Many of the U.S. stocks that raise their dividends year after year are found in the very sectors that growth investors eschew such as consumer staples, health care and telecommunications. Dividend growth is important for a simple reason. While it is nice if a company pays a $1-per-share annual dividend, it is even more favorable if that dividend increases by just 5 percent every year. Over the long term, the investor's returns are positively affected by dividend growth.
Look For Unheralded Names
Looking for so-called hidden gems can be a winning strategy for both growth and income investors. It can be especially potent when it comes to growth stocks because many of the best growth stocks often generate their best returns before all of Wall Street knows about them. Investors can find these hidden gems by looking for stocks in growth industries that have little or no analyst coverage. Dividend investors can find their own hidden gems by looking for smaller equivalents of some of the largest companies in the popular dividend sectors.
In many cases, great growth companies are producing products and services that can be described as revolutionary. Whether it is a new drug to cure a major disease or providing a service that changes the way consumers shop, the best growth companies are usually doing something that no company before them did.
Todd Shriber is a financial writer who started covering financial markets in 2000. He worked for three years with Bloomberg News and specializes in analysis of stocks, sectors and exchange-traded funds. Shriber has a Bachelor of Science in broadcast journalism from Texas Christian University.