As investors continue to look for income in a yield-starved market, I see two mistakes being made consistently. One is focusing on just absolute current yield. While it may seem to make sense to maximize your income today, investors should not overlook the need for income to grow in the future. No matter what the official inflation statistics may say at the moment, we all know that the real cost of living goes up steadily over time. Your income needs to grow, so a portion of your income portfolio should consist of stocks expected to offer strong dividend growth.
The second mistake I see is chasing yield regardless of fundamentals. Fortunately we can use Portfolio Grader to assemble dividend-paying growth stocks with excellent fundamentals. Companies with strong earnings growth should be able to increase your payout and see the stock price go up as fundamentals continue to improve.
Consider Six Flags Entertainment (SIX), the largest regional theme park operator in the world. More than 150 million people live within an hour’s drive of one of the company’s 18 locations. The company reorganized under bankruptcy laws, emerging in 2010 as a leaner operation. Business has been very strong ever since, and 2013 should be another banner year for Six Flags.
Management is very shareholder-friendly: In addition to a $4.75% dividend they have been aggressively buying back stock. The stock not only offers a decent yield, but analysts expect it to grow at more than 25% annually for the next several years at least. This is a great company — and it’s reflected in its Portfolio Grader rankings. It has continually been a “buy” for the past year and was upgraded to a “strong buy” last month.
Geo Group (GEO) also remains a favorite dividend and dividend growth selection. The company manages prisons and detention centers and has more than 73,000 beds worldwide. The stock pays 5.61% at the current price and has outstanding dividend growth prospects. The company started operating as a real estate investment trust (REIT) back in January and must pay out 90% of its earnings to maintain that status.
Given the prospect for growth in outsourced corrections and detention facilities around the world, earnings and dividend growth should be strong for the foreseeable future. Thanks to the outstanding fundamentals of the business Portfolio Grader has ranked the stock “A” since last October and it remains a “strong buy.”
When investing for income, keep in mind that tomorrow’s income can be just as important as today’s. Use Portfolio Grader to add some companies with excellent fundamentals and strong dividend growth prospects to your income portfolio.
Louis Navellier is the editor of Blue Chip Growth.