Which are the best shares to buy now, growth or dividend shares?

Thousands are getting in on the stock market crash, but you do need a strategy. Today I’m looking at a few dividend and growth share possibilities.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

I reckon it’s a brilliant time to start buying shares right now, while the stock market crash is throwing up so many cheap ones. But to reap the biggest benefits, you need to have a long-term strategy. Typically, investors are split into two camps. Some seek share price growth, while others seek income from dividends.

Generalising a bit, dividend investors are often seen as preferring safety, while growth investors are prepared for a bit more risk. Me, I’m happy to take the cash whichever way it comes.

Breaking it down into growth and dividend stocks can help narrow down the bewildering array of choices out there. And it can help you focus on the measures you’re happiest with. I’m going to pick five of each from the FTSE 100, based on two simple measures.

Passive income stocks: our picks

Do you like the idea of dividend income?

The prospect of investing in a company just once, then sitting back and watching as it potentially pays a dividend out over and over?

If you’re excited by the thought of regular passive income payments, as well as the potential for significant growth on your initial investment…

Then we think you’ll want to see this report inside Motley Fool Share Advisor — ‘5 Essential Stocks For Passive Income Seekers’.

What’s more, today we’re giving away one of these stock picks, absolutely free!

Get your free passive income stock pick

Top dividend shares

For dividend shares, I’m just looking at forecast yield. That’s the expected dividend expressed as a percentage of the share price. So a share priced at 100p paying a 5p dividend yields 5%. I’m basing this on the forecasts for next year, not the current year, to try to look as far past the Covid-19 crisis as possible. Such forecasts will be very uncertain now, but will be partly based on long-term trends, so I think it’s a useful exercise. These are the five biggest dividend yields in the FTSE 100 (though it will vary depending on which forecasts you use and how share prices change)…

Company Forecast yield
Imperial Brands 10.1%
Legal & General 9.5%
Polymetal International 8.5%
Aviva 8.4%
BP 8.4%

Others hovering just outside the top five include Persimmon (7.8%), Vodafone (7.5%), and HSBC (7.5%). So there’s a nicely diversified dividend selection available. And I reckon there’s growth potential in some of these too.

The dividend yield does not tell the whole story, and I’ll examine dividend selection criteria in more detail in a later article. But this should be enough to get you started thinking about dividend investing.

Top growth shares

For my growth share selection, I’m using a measure called the price-to-earnings-growth (PEG) ratio. It’s something that compares the current valuation of a share with its forecast earnings growth. And a lower number is better, providing it’s positive. I think it’s vital to keep valuation in mind when looking for growth shares rather than just earnings growth. Without that, we can get sucked into share prices being pushed to silly levels, and suffer big losses when the bubble bursts.

Now, because many companies are expecting a big earnings drop this year followed by a quick recovery next, there are lots of FTSE 100 shares with very low PEG ratios. In this list I’ve just selected five of the very lowest, picking from five different sectors. I’ve also included P/E multiples for a bit of extra information. Some of them pay decent dividends too.

Company P/E PEG
HSBC 9.1 0.1
Glencore 13.2 0.1
Taylor Wimpey 9.9 0.1
Next 16.3 0.2
Associated British Foods 15.6 0.3

I’ll examine growth investing further in a later article, where I’ll cover some pitfalls of using the PEG ratio and some types of companies it doesn’t work well for. But for now, we at least have a small selection whose forecast growth makes them look promising. And the way HSBC has shown up in both lists is intriguing.

Is this a top choice for growing wealth now?

Before deciding, we think this pick is another must-see.

Discover ‘One Top Growth Stock from The Motley Fool’ absolutely FREE.

Though past performance does not guarantee future results, over the past 5 years, it’s seen consistent double-digit revenue growth. ‘Return on capital’ - a key measure of business quality - is a colossal 57%. That’s almost 6 times higher than the UK average!

Best of all, it has a cult-like following. Customers who’re raving fans, potentially spending more money, more often - whatever the economy.

In our experience, discoveries like this are extremely rare.

So please, don’t leave without seeing, ‘One Top Growth Stock from The Motley Fool’, which includes both the Risks and opportunities.

Claim your FREE copy now

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Alan Oscroft owns shares of Aviva and Persimmon. The Motley Fool UK owns shares of Next. The Motley Fool UK has recommended Associated British Foods, HSBC Holdings, and Imperial Brands. 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.

More on Investing Articles

Modern suburban family houses with car on driveway
Investing Articles

Down 59% from its 12-month highs, is this FTSE 250 stock too cheap to ignore?

Shares in FTSE 250 housebuilder Vistry are almost certainly too cheap to ignore. But are they discounted enough to offset…

Read more »

Young Asian woman with head in hands at her desk
Investing Articles

As the S&P 500 struggles to recover, here’s what Warren Buffett’s doing

The S&P 500 is fighting to regain its February highs amid ongoing trade tariff uncertainty. Our writer looks to the…

Read more »

Investing Articles

When will Lloyds shares hit £1?

Lloyds shares have surged over the past 12 months, but where will they go next? Dr James Fox thinks there’s…

Read more »

Middle-aged white man wearing glasses, staring into space over the top of his laptop in a coffee shop
Investing Articles

Stock-market crash: the meltdown of the Magnificent 7

Just before Christmas, these Magnificent Seven stocks were riding high. But after the worst quarter for US stocks since autumn…

Read more »

Investing Articles

Wow! IAG shares are undervalued by 47%, according to analysts

IAG shares have surged over the past 18 months, but analysts are pointing to more growth. Dr James Fox takes…

Read more »

Investing Articles

2 cheap FTSE 100 and FTSE 250 shares to consider for an ISA before 5 April!

These FTSE 100 and FTSE 250 shares are on sale today! Here's why long-term Stocks and Shares ISA investors should…

Read more »

Investing Articles

How I’m building a new second income for 2035

Millions of us invest for a second income. Here are the steps Dr James Fox is taking in order to…

Read more »

Investing Articles

At a 52-week low but forecast to rise 73%! Is this growth share the FTSE’s top recovery play? 

This FTSE 100 growth share has taken an absolute beating over the past two years but Harvey Jones says the…

Read more »