£5000 to invest? 3 dividend shares with growth potential I’d buy now

Dividend shares don’t have to be slow-growing. Harshil Patel considers three top picks that offer faster growth potential too.

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.

Surprised Black girl holding teddy bear toy on Christmas

Image source: Getty Images

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.

It’s often thought that dividend shares are exclusively established and slow-growth companies. And quite often they are just that. But why should I settle for companies that grow slowly when there are faster-growing shares available that also pay dividends?

I reckon I can have my cake and eat it, capturing both a decent dividend yield and earnings growth. By doing so I can hopefully make some capital gains over time in addition to some yearly income.

Picking the best dividend shares

Quite often, history can give a guide to what I can expect. Now, I must include a caveat here. History doesn’t predict the future. But with some of the more mature, established and stable companies, it might provide some clues.

I’ve got some criteria to narrow down my search for the best dividend shares that also have growth potential. The average dividend yield for the FTSE 100 is currently 3.4% so I’m looking for shares that yield above this figure. I like consistency, so I’m looking for companies that have been paying regular dividends for at least 10 years. For growth, I’d like to see three things. Firstly, I want double-digit annual earnings growth for the past five years. Secondly, I’d aim for positive forecast earnings growth for the upcoming year. Some indication that earnings could rise might give me some confidence. Finally, I’d like to see some share price momentum. For instance, it would be nice to see share price gains of over 5% per year over the past half-decade.

Top picks

Several companies match my criteria but I’ll focus on the top three that I’m considering for my Stocks and Shares ISA now. If I was investing £5,000 today, I’d split it between these three top picks. Mining giant BHP Group currently offers a 10% dividend yield. That’s far above average and normally I would have some suspicions on whether that level of yield can be sustained. However, BHP has over a 20 years history of paying dividends. Its share price has also gained by 8% per year over the past five years. To top it off, annual earnings growth for the last five years is a whopping 66%.

Another mining giant Rio Tinto fulfils similar criteria. With over a decade of dividend-paying history and a generally upward trending share price, I like what I see. I’d say that its profit margin of almost 50% is equally impressive, as well as its 11% dividend yield. In fact, including special dividends, its dividend yield jumps to an even more impressive 15%.

Next, I’m considering Jarvis Securities. With a market capitalisation of just £122m, it’s far smaller than my other two picks. However, what it lacks in size, it makes up in potential. Long-term shareholders have been rewarded with a 30% annual share price return over the past five years. I’d expect earnings and the share price to grow further. Currently the shares offer a 4% dividend yield. It’s much lower than Rio and BHP but I reckon it offers greater growth potential to make up for it.

A word of warning, however. Earnings can fall for a number of reasons. And a significant drop in earnings can force a company to suspend its dividend payments. This was a common occurrence during the Covid crash in March 2020. That said, by holding a basket of diversified dividend shares I hope to lower my risk.

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.

Harshil Patel has no position in any of the shares mentioned. The Motley Fool UK has 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.

More on Investing Articles

Growth Shares

BT shares? I think there are much better UK stocks for the long term

Over the long term, many UK stocks have performed much better than BT. Here’s a look at two companies that…

Read more »

British Pennies on a Pound Note
Investing Articles

After a 540% rise, could this penny share keep going?

This penny share has seen mixed fortunes in recent years. Our writer looks ahead to some potentially exciting developments in…

Read more »

Silhouette of a bull standing on top of a landscape with the sun setting behind it
Investing Articles

Is the S&P 500 going to 10,000 by 2030? This expert thinks so

One stock market strategist sees animal spirits taking hold and driving the S&P 500 index even higher by the end…

Read more »

Investing Articles

I’m expecting my Phoenix Group shares to give me a total return of 25% in 2025!

Phoenix Group shares have had a difficult few months but that doesn't worry Harvey Jones. He loves their 10%+ yield…

Read more »

Hand of person putting wood cube block with word VALUE on wooden table
Investing Articles

14.5bn reasons why I think the Legal & General share price is at least 11% undervalued

According to our writer, the Legal & General share price doesn’t appear to reflect the underlying profitability of the business. 

Read more »

Young black man looking at phone while on the London Overground
Value Shares

After a 16% drop, FTSE 100 stock JD Sports Fashion looks like a steal to me

This FTSE 100 stock has tanked since mid-September. Edward Sheldon believes that there's value on offer after the share price…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Is now the time to buy BP shares? Here’s what the charts say

The best time to buy shares in a company is when they’re trading at a discount. But the future is…

Read more »

Investing Articles

Here’s how I’d use £50K to aim for a million when the stock market crashes

Seeing a stock market crash as a buying opportunity could prove lucrative for a well-prepared, long-term investor. Christopher Ruane explains…

Read more »