With interest rates being at historic lows, many investors have become increasingly interested in high yield stocks. That’s completely understandable, since the return on cash balances has sunk to paltry levels and, even though we now have deflation, a real return of less than 2% is still pretty dire.
And, while various research studies have shown that dividends (and their reinvestment) make a huge impact on investment returns over a long period, the appeal of bottom line growth remains very strong. In fact, there is nothing the market likes more than a company that can grow its earnings at a faster pace than the wider index and, when this situation arises, share price growth can be astounding.
Of course, finding stocks that can grow their profit in a consistent manner over a long period of time is very tough. One company that comes close to offering this is alcoholic beverages company, Diageo (LSE: DGE) (NYSE: DEO.US). Prior to last year, it had grown its net profit at an average annual rate of 10.3% since 2010, which is roughly 50% higher than the growth rate of the wider index. However, last year it ran into difficulties, with the performance of emerging markets not being as strong as expected. And, in the current year, this situation is expected to continue, with a fall in earnings of 6% currently being forecast.
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Despite this, Diageo remains a very appealing growth play, with the long term potential of emerging markets likely to be very strong. And, as soon as next year, its bottom line is expected to return to growth of 8%, which makes now a great time to buy a slice of it while investor sentiment is not as buoyant as it previously was.
Similarly, shares in easyJet (LSE: EZJ) have endured a challenging period of late, with them being down 11% in the last month. However, the reason for this is weaker than expected financial performance due to the French air traffic control strike and, as such, now could be a great time to buy a slice of the company. That’s because the company’s longer term outlook remains very bright, with double-digit growth forecast for the next two years and a subdued share price indicating that capital gains are very much on the cards.
Meanwhile, TalkTalk (LSE: TALK) and Laird (LSE: LRD) have made superb starts to 2015, being up 31% and 24% respectively. And, looking ahead, further gains could be around the corner since both companies have very upbeat growth prospects. For example, TalkTalk is expected to grow its bottom line by 92% this year and by a further 55% next year, while Laird’s net profit is set to be 17% higher this year, followed by a further rise of 11% next year.
Best of all, both TalkTalk and Laird trade on price to earnings growth (PEG) ratios of just 0.3 and 1 respectively, which indicates that they, alongside Diageo and easyJet, appear to be well placed to post excellent returns over the medium to long term.
