In my view, the best companies to buy shares in have three features – increasing revenues, a growing dividend, and a declining share count. I call a stock that has all three a ‘triple threat’.
I think these stocks can be great choices for investors looking to find a use for their excess savings. There are two right now that I’d go for with a spare £1,000.
Diageo
While the FTSE 100 rallied at the end of last year, the Diageo (LSE:DGE) share price fell after a weak sales outlook for Latin America and the Caribbean. This looks to me like an opportunity.
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Beyond Latin America and the Caribbean, there’s a risk that growth might be slower than the market is expecting. And this could cause the stock to fall.
In general though, Diageo’s revenue has grown steadily. Over the last decade, sales have increased by an average of 5% a year.
On top of this, the company’s share buyback programme has brought down its share count from to 2.5bn to 2.24bn. Together, these two factors have been a powerful force for dividend growth.
As a result, Diageo’s dividend has increased from 49p per share to 80p. And I think it has some way to go, which is why I’d look to take the opportunity to buy the stock while it’s down.
Apple
The same combination of increasing revenue, share buybacks, and dividend growth is why Apple (NASDAQ:AAPL) shares are up almost 400% since 2019. That’s why it’s billionaire investor Warren Buffett’s top stock.
Unlike Diageo, Apple’s share price hasn’t faltered lately – in fact, it’s close to all-time highs. That makes buying it at today’s prices risky, but I’d still buy the stock now.
I think it’s significant that the stock has been at all-time highs a lot over the last few years. And the company has grown its earnings at a rate that has made its price look like a bargain every time.
Over the last five years, Apple has increased its revenues by an average of 7% a year and reduced its share count from 18.6bn to 15.5bn. As a result, the dividend has grown from $0.68 per share to $0.96.
That’s not a huge yield, but the company uses less than 15% of its free cash on dividends. The rest can be used to keep the process of growing revenues and repurchasing shares going.
2 out of 3 ain’t bad…
The ‘triple threat’ is a rare find in dividend stocks. A lot of companies have one or two – Halma, for example, has growing revenue and an increasing dividend, but no additional buyback boost.
Equally, Lloyds Banking Group has been increasing its dividend and buying back its stock. Its revenues though, have been up and down.
Diageo and Apple have all three. So I’d be happy buying both for my portfolio.
By itself, a £1,000 investment isn’t going to get me to early retirement. But regularly deploying my excess cash into strong dividend stocks seems like a good approach to me.
