Dividends and Growth: Can They Coexist?

Chris is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

A lot of people love dividends as much as I do, which I can tell because people seem to like posts about these glorious cash payouts. But there's usually a pretty heavy price to pay for good dividends -- the loss of solid growth prospects. At least that's what a lot of people think. How can a company pay its investors and have anything left to finance the hardcore growth levels necessary to become a multi-bagger? It's like trying to go out and stay home at the same time. I want to test this theory because I sometimes wonder about the groupthink in this world. Are there companies that pay a dividend and still have solid growth potential?

Empresa Nacional Electricidad (NYSE: EOC) is a power company, and extreme growth prospects are the first things most people think of when they hear about a utility. No, not really. With its 2.9% yield, I'd never call this an income superstar, and with a $12 billion market cap it's hard to imagine impressive growth coming out of it. However, Empresa does pull a 16.25% profit margin and boasts a 16.63% ROE, which give it plenty of cash and efficiency to grow on. And having grown by 62.78% over the past 5 years, Empresa just might be a rule-breaker. There's still a lot of growth potential in South America, particularly as Rio gears up for the 2016 Olympics.

BBVA Banco Frances (NYSE: BFR) is a bank with plenty of history. Working since 1886, the oldest private bank in Argentina is no hot young startup. With a market cap of $665 million, it has room to grow. But it pays an 8.1% dividend. On the other hand, it's only grown 29.92% over the past 5 years. But on the magical third hand, BBVA is rocking an ROE of 30.71%, which is a pretty high caliber of efficiency. With its 26.72% profit margins, this bank has room to get bigger. I like this company, and I may end up checking it out in more depth when my window for acquiring shares reopens.

Schweitzer-Mauduit International (NYSE: SWM) makes paper. But not just any paper, mind you -- really good paper. As an art major, I can honestly say there's a difference, although I'll have to take their word for it on the cigarette paper. Usually a strong brand and a 1.1% dividend put together mean your growth rate is destined to be tortoise-like. But I like Schweitzer's chances, and not just because I like saying "Schweitzer." I also noticed that the profit margin is a reasonable 11%, the ROE is just over 18% and the past five years have watched Schweitzer grow 78.57%. While the dividend isn't great, right now it's better than my savings account and potentially taxed better (consult an expert before you take my word for that; I can just see my accountant rolling his eyes). Overall, this is a company that still has room to ... roll onward. Get it, rolls of -- okay, nevermind. Moving on.

Yanzhou Coal Mining (NYSE: YZC) mines coal in mainland China. Considering coal's usefulness as a source of carbon for producing steel, and the fact that much of the world still uses coal for heat and power, I like this company as a solid holding. Doing a quick check under the hood, I like the 10.68 forward P/E and the 16.32% profit margin. I'm not super keen on the 1.6% dividend, but it's reasonable. I really like the 20.72% ROE, but at the same time I'm nervous about the reporting standards that Chinese companies are held to. I've made mistakes in the past because I was too trusting -- not cool. But the fact that Yanzhou has grown 75% in the past 5 years is pretty indisputable.

I'm tempted to say that there's a very real connection between dividend payments and growth stagnancy, but I don't know. I think there is a possibility of the two walking hand-in-hand, and that's a match made in heaven in my opinion.


pongun has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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