In part one of this series, I looked at secure dividend paying stocks that could form a solid, buy-and-hold backbone for any portfolio. In part two, I looked at the possibility of including double-digit high yield stocks in a portfolio and the risks that come with such a strategy. In this part, I am going to look at two growth stocks that offer lower yields than their peers but come with the possibility of capital growth as well as dividend payments.
Why growth stocks?
Growth stocks should be an essential part of a portfolio. While many investors consider growth stocks risky, there are in fact some relatively safe companies out there that are primed for growth, backed up with solid balance sheets, cash flows and dividend payouts.
Two such stocks are Verizon Communications Inc. (NYSE:VZ), and Cisco Systems, Inc. (NASDAQ:CSCO). Twocompanies with potential for growth but at the same time, solid balance sheets and reliable cash flows from operations.
Balance sheets and cash flows
|Net debt (Cash)||$48.4||($32.4)|
|Net debt to EBIT||3.5||N/A|
Verizon Communications Inc. (NYSE:VZ)’s balance sheet is stronger than that of peer AT&T Inc. (NYSE:T), (which I covered in part 1) and while the company’s current ratio is low, it is similar to that of its peers in the telecoms sector and net debt is only three-and-a-half times earnings-before-interest and tax. Furthermore, the company’s interest costs are covered nearly five times over by earnings. Cisco Systems, Inc. (NASDAQ:CSCO), on the other hand, has one of the best balance sheets in the S&P 500. With a net cash position of $32.4 billion, the company has a current ratio of three-and-a-half times. Moreover, the interest on Cisco’s small amount of debt is easily covered 18 times over by earnings.
So overall, Verizon and Cisco Systems, Inc. (NASDAQ:CSCO) both have solid balance sheets to back up their future growth.
What about the lower Yield?
Cisco offers a dividend yield of 2.8%, while Verizon offers a yield of 3.9%, both lower than the yields offered by all the other companies I have talked about in the rest of this series. However, Verizon Communications Inc. (NYSE:VZ)’s and Cisco’s dividends are actually stronger than some of the companies that offer a higher payout, such as AT&T.
|Operating cash flow||$38.9||$31.5||$11.5|
|Investing cash flow||-$19.4||-$20.5||-$3.8|
|Dividend cover by cash flow (operating-investing)||1.9x||2.2x||5.1x|
|Free cash flow||$9.2||$10.1||$8.9|