As an investor, I’m usually attracted to a stock due to either the dividends paid or the growth potential. The characteristics of the best FTSE 100 stocks in each of these areas are different, however this doesn’t mean that I can’t combine to try and get the best of both worlds. Here are three ways I’m trying to find stocks that meet both criteria.
Looking for growth via dividends
The first way is to look at the dividend growth per share instead of the dividend yield. The dividend yield is the traditional method to find the best FTSE 100 stock for income. Yet this doesn’t actually tell me if the dividend has been growing. Granted, the dividend yield may be rising due to a higher dividend per share, but equally it could be due to the share price falling.
By using the dividend growth per share, it offers me a much cleaner picture of how the business is performing. If the dividend per share has been increasing by whatever percentage over the past few years, it gives me confidence. This confidence is not only about income payments either, but also about share price growth. After all, if the dividend is growing year after year, I’d expect the business to be growing as well.
Aiming for attractive valuations
Another way to find the best FTSE 100 stocks is to look at the price-to-cash-flow ratio. This essentially shows me how much I’m paying for every pound of cash flow generated by the business. The lower the ratio the better for me when I’m looking for potential share price growth. This is because it could indicate the stock is undervalued.
However, this metric also helps me when looking for income potential. High cash flow relative to a low share price should allow the business to pay out some of this as dividends. Clearly, cash flow doesn’t always translate into net profit. But high cash flow provides more opportunity for the business to turn it into profit versus a company with poor flows in this regard.
The best FTSE 100 stocks for the future
The final way I’d try to mix the best of both worlds is by looking at the sector growth, both current and forecast. The FTSE 100 contains stocks from a wide variety of sectors. If the industry as a whole isn’t growing or is stagnant, then it doesn’t bode well for potential high share price returns or income payments.
Rather, I’d look for areas that are growing and could continue to push forward in the future. I’ve written before that some examples here include healthcare, renewable and green energy and housing.
One risk here is that if the area is seeing very high growth, the best FTSE 100 stocks might reinvest profits into projects instead of paying out dividends. However, this likely benefits share price growth in the short term, with dividends likely further down the line.
Overall, share price appreciation or dividends don’t have to be mutually exclusive goals when I’m looking to make investment choices.
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jonathansmith1 and The Motley Fool UK have no position in any of the shares mentioned. 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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