Investing in growth stocks can generate impressive returns for your portfolio. The one downside of this strategy is that growth stocks don’t usually pay dividends as they prefer to retain the cash to reinvest back into the business.
With this being the case, I believe the best strategy is to combine both income and growth stocks in your portfolio, to get the best of both worlds.
FTSE 100 income champion 3i Group (LSE: III) and Redcentric (LSE: RCN) could be perfect picks for this strategy.
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Small-cap profits
3i is an investment business, specialising in private equity. Over the years, the company has achieved outstanding returns for investors with the shares gaining 184%, excluding dividends, since 2013. Over the same period, the FTSE 100 has produced a total return of only 17%, once again excluding dividends.
And when it comes to dividends, 3i stands out. Over the past five years, the firm has increased its per share distribution from 8.1p to 26.5p, a compound annual growth rate of 26.8%. At the time of writing, the shares support the dividend yield of 3.2%.
As my Foolish colleague Kevin Godbold recently pointed out, one of 3i’s most attractive qualities is its exposure to small businesses. The company invests in smaller firms, which it identifies as having significant potential. Management helps these firms access capital and new markets and when the business has matured, it sells out, hopefully with a substantial profit.
This approach enables investors to profit from the growth of smaller companies without having to take on the additional risk that usually comes with investing in this space.
3i is also able to invest in countries and businesses that the average investor would be unable to access. For example, at the end of March, the company sold its stake in ferry operator Scandlines, which operates ferry routes between Germany and Denmark, booking a total profit of €347m.
Better than expected
As 3i continues with its process of buying, building and selling, I believe shareholders should continue to reap the benefits. To complement 3i’s income, Redcentric could give your portfolio the growth boost it needs.
After several years of disruption, the IT services business is expected to return to growth this year. City analysts have pencilled in normalised earnings per share growth of 536% to 5.1p (from 0.8p), and an increase of 17% is expected for 2019.
According to a trading statement issued by the business today, the company is well on the way to hitting these targets. Meanwhile, debt reduction is running ahead of plan. Management reports that net debt at the end of March was £27.7m, “better than the board’s expectations.“
While a consequent forward P/E ratio of 15.6 times may not be compelling on paper, I reckon the prospect of additional electrifying earnings growth in the year ahead makes the business exceptional value at current prices. Especially considering the fact that 87% of the company’s revenue is recurring in nature.
