Are you a growth investor, or do you prefer to go for dividend income?
If growth is what you’re chasing, you could so a lot worse than ARM Holdings (LSE: ARM). The remarkable thing about chip designer ARM is that since its shares started their climb back in early 2009, the price has risen by a staggering 1,140% to today’s 1,008p. If you’d bought shares back then, your investment would be worth more than 12 times its initial value today — plus a little from some modest dividends.
That share price rise has been underpinned by earnings rises, with 2009’s normalised earnings per share (EPS) of 4.2p per share climbing to 30.2p per share in 2015. There’s more of the same to come too, with the City’s analysts forecasting a 43% rise in EPS this year followed by a further 13% next. That would put the shares on a P/E for 2017 of 25, which is quite a bit higher than the FTSE’s long-term average of around 14 — but top growth shares usually command high P/E valuations, and this is ARM’s lowest for some years.
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Steady cash
Or if you want steady income, how about British American Tobacco (LSE: BATS)? While it’s not providing one of the highest cash payouts out there, the tobacco company offers dividends consistently yielding around 4% per year or even a bit higher. With on-going strong revenue, and with the dividends covered around 1.4 times by earnings, they look very safe to me too.
The firm has a progressive dividend policy too, with 2015’s payment raised by 4% to 154p per share — and dividends that rise faster than inflation are a key factor to look for when you’re investing for the long term. Forecasts for this year suggest a further 6.5% hike to 164p, followed by a 4.9% increase in 2017 to 172p.
And it’s a trend that looks likely to continue for some time, as smokers in the developing world increasingly look to move upmarket in their pursuit of the habit.
It’s not that simple
Having said all that, the lines between growth and income are actually quite blurred. If you’d bought British American Tobacco shares at the end of 2000, as well as all those lovely dividends you’d have also enjoyed a 750% share price rise, to 4,042p — so there’s growth there as well.
And if you’d snagged some of those 2009 ARM shares at around 82p, the dividend of 8.78p per share paid in 2015 would have given you a 10.7% yield on your original investment price — with its progressive dividend policy, ARM is well on its way to becoming a mature dividend payer too.
Anyway, I think the growth vs income dilemma is largely a false one. If you haven’t reached the time to start taking an income from your investments, then you should be reinvesting dividends by buying new shares if you want to maximise your returns. And if you’re taking income, it’s as easy to sell some shares as and when you want cash as it is to wait for dividend payment time.
Which is better?
In my view, you can’t beat a good combination of classic growth and classic income shares. I’d be held back from tobacco companies myself for ethical reasons, but I do think both of these will continue to provide great investment returns.
