A lot of investors focus on either growth stocks or dividends. But a handful of really outstanding shares offer both.
Some businesses can grow while paying out cash to shareholders. And these can be terrific investments.
Growth vs dividends
In most cases, the trade-off between growth and income is real. And there’s a simple reason why.
Businesses have a choice about what they do with their cash. One option is to use it for growth.
Companies grow by opening new facilities, hiring more staff, or even buying competitors. That’s great, but there’s a catch.
All of this costs money. And any cash used for doing these things can’t be returned to investors as dividends.
Alternatively, they can distribute their profits to shareholders. This creates income for investors, but it creates zero growth.
Most businesses do a combination, but the choice remains. Cash used for dividends doesn’t generate growth.
Warren Buffett
That’s the reality for most companies. But in a few extremely rare cases, investors don’t have to choose.
Some businesses can grow without using the cash they generate. And in that situation, dividends don’t slow them down.
In his 2022 letter to Berkshire Hathaway shareholders, Warren Buffett identified two of these. They were Coca-Cola and American Express.
Both have managed to grow over time. But they haven’t had to use the cash they’ve generated to do this.
One example in both cases is price increases. This boosts sales, but costs the company nothing.
That means growth isn’t limited by paying dividends. And that’s why they’ve been such great investments for Berkshire.
FTSE 100
These companies are rare and not easy to find. But UK investors can find a couple in the FTSE 100.
One is Games Workshop (LSE:GAW). The firm consistently returns over 80% of its profits to investors.
Despite this, it’s been one of the fastest-growing FTSE 100 stocks of the last 10 years. And it might only be getting started.
The company has a lot of scope to expand in the US. And its upcoming Warhammer film could be a big catalyst for that.
Inflation or a recession could dampen demand for its products. They aren’t cheap and they’re discretionary.
Investors should therefore expect volatility. But while any year might be challenging, the firm has clear long-term strengths.
Unique strength
This is why Games Workshop shares have performed so well in the last 10 years. It’s not an accident.
The question for investors is whether the firm can keep this up. And I think it can.
Nobody else can make Warhammer products. But there’s something that’s even more important, in my view.
There are lots of strong franchises, but they aren’t as successful as Games Workshop. The reason is management.
Unlike some companies, the firm puts its customers ahead of short-term profits. That’s why it’s built such a loyal following.
This principle is deeply embedded in the organisation. And that’s why I’m positive about the stock.
Opportunity?
With most stocks, the choice between growth and dividends is real. That’s because most companies have to invest to grow.
In a few rare situations, though, this isn’t the case. And Games Workshop is one of them.
That’s why I think it’s a stock that every investor should keep a close eye on. Growth or dividends, this company offers both.
