Many of my friends like to ask me what my favorite stocks are. Ideally, my portfolio should contain a healthy mix of growth stocks and dividend stocks. This is because I want to structure the portfolio in such a way that I get passive income while also growing my wealth in the long term. Call it the best of both worlds if you want, but I believe such a mix helps me achieve diversification while providing ample exposure to both growth and income stocks.
You can do the same for your portfolio if you’re looking for a mix of growth and income. Dividend stocks should include companies that generate consistent free cash flow and have a long history of paying dividends. Growth stocks, on the other hand, must have sustainable catalysts that can allow the company to grow its revenue and net income over the long term.
Here are three favorite stocks to consider buying for your investment portfolio.
Revenue grew from $4.2 billion in 2021 to $5 billion in 2023, while net profit rose from $464 million to $590.1 million in the same period. The company also generated average annual free cash flow of $365 million, demonstrating Lennox’s ability to generate reliable free cash flow that can be used to pay dividends.
The climate control specialist has dutifully paid quarterly dividends since 2000, most recently increasing its quarterly dividend by 4.5% year-over-year to $1.15 per share in May.
The company has continued its strong financial performance in the first half of 2024. Revenue rose just 1.5% year over year to $2.5 billion, but operating income rose 16.4% to $486.9 million. Lennox’s net profit was $370.2 million, up 17.4% from net profit of $315.2 million a year ago. Free cash flow was $99 million in the first half of this year, more than triple what was generated in the previous corresponding period.
Lennox also reaffirmed its full-year revenue guidance of 7% year-on-year growth and upgraded its earnings per share (EPS) guidance. The company now expects earnings per share to be in the range of $19.50 to $20.25, up from the previous range of $19 to $20.
Management updated its set of long-term goals for 2026 with an increase in target revenue to a range of $5.4 billion to $6 billion, up from $5 billion to $5.5 billion previously. The company also expects to convert approximately 90% of its net profit into free cash flow, continuing its track record of generating healthy free cash flow.
This increasing free cash flow should continue to fund higher dividends, making Lennox an ideal stock for income investors. The company plans to expand its distribution network and use generative artificial intelligence (AI) in its products. These plans should help fuel continued growth and attract a broader range of customers to use the products.
Tractor supply company (NASDAQ: TSCO) is the largest rural lifestyle retailer in the US. The company owns and operates 2,254 Tractor Supply stores in 49 states and employs more than 50,000 associates. Tractor Supply can offer an attractive mix of both growth and dividends, as evidenced by its impressive financial performance in recent years.
Revenue increased from $12.7 billion in 2021 to $14.6 billion in 2023, with net profit rising from just under $1 billion to $1.1 billion over the same period. The retailer also generated annual average free cash flow of $558 million over these three years.
The steady increase in profits and cash flows has allowed Tractor Supply to nearly double its annual dividend from $2.08 in 2021 to $4.12 in 2023. Notably, the company has increased its annual dividend without fail since 2010, with last quarterly dividend came to $1.10 per share, compared to $1.03 a year ago.
The retailer continued its run of strong performance by reporting higher sales and profits for the first half of 2024. Sales increased 2.1% year over year to $7.6 billion, while operating income improved 2.6% to $824 .6 million. Net income improved 3.2% to $623.3 million, and the company generated positive free cash flow of $467.5 million, up 8% from a year ago.
In the first half of this year, Tractor Supply opened 38 stores and seven new Petsense by Tractor Supply stores. There could be further room for both earnings and dividend growth. Management has increased its long-term store target to 3,000 in the U.S. alone, 200 more than the original target, as it believes there is still room to open more stores to serve the rural community. Store openings should increase over the years, with 80 planned for this year and 90 next year.
Earlier this year, Tractor Supply also revamped its Neighbor’s Club loyalty program and expanded it with more personalized benefits to capture shoppers’ interest and keep them spending. There is also a lower threshold to reach the program’s Preferred Status, and higher-level members can earn points more quickly. Such changes should increase customer loyalty and encourage existing customers to spend more.
With around 30 million members, Tractor Supply appears poised to do well in the medium term.
ResMed (NYSE: RMD) is a leader in sleep apnea and breathing care solutions and sells its products and devices in more than 140 countries. The company provides digital solutions to help people manage chronic conditions such as sleep apnea and chronic respiratory disease using technology-driven integrated care.
Growth has been impressive over the past three years. Revenue rose from $3.6 billion in fiscal 2022 (ended June 30) to $4.7 billion in fiscal 2024. Net income rose from $779.4 million to $1 billion during the same period. Free cash flow has also improved by leaps and bounds, from just $216.3 million in fiscal 2022 to $1.3 billion in the most recent fiscal year.
Management believes that the markets they serve are only the tip of the proverbial iceberg. There are more than a billion people suffering from sleep apnea, while approximately 480 million people suffer from chronic obstructive pulmonary disease (COPD) and almost 860 million people suffer from insomnia. Together, these 2.5 billion people form the total addressable market (TAM) for ResMed, as these three chronic diseases are the most common worldwide.
ResMed also recently released its 2030 growth outlook, which targets high-single-digit year-over-year revenue growth and expects profits to grow faster than sales. One of the pillars underlining this ambitious strategy is the use of AI and machine learning to improve therapy performance and broaden consumer appeal. The company will also invest 7% of its revenue in research and development to create and deliver a fully integrated digital ecosystem to deliver effective home health solutions.
With these plans, ResMed appears well positioned to continue growing as it leverages its strengths to tap into a huge market for sleep apnea, COPD and insomnia.
Before purchasing stock from Tractor Supply, please consider the following:
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Royston Yang holds positions in Tractor Supply. The Motley Fool has positions in and recommends ResMed. The Motley Fool recommends Tractor Supply. The Motley Fool has a disclosure policy.
My 3 Favorite Stocks to Buy Now was originally published by The Motley Fool
