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 a way that gives me passive income while helping me to compound my wealth over the long term. Call it the best of both worlds if you will, but I believe that having such a mix helps me to achieve diversification while also providing sufficient exposure to both growth and income stocks.
You can do the same for your portfolio, too, if you seek a mix of growth and income. Dividend stocks should include businesses that generate consistent free cash flow and have a long history of paying out dividends. Growth stocks, on the other hand, need to possess sustainable catalysts that can ensure the business can grow its revenue and net income for the long term.
Here are three favorite stocks that you can consider buying for your investment portfolio.
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Lennox International(NYSE: LII) is a market leader in energy-efficient, climate-control solutions. Some of its products include heat pumps, furnaces, air conditioners, chillers, and indoor air-quality systems. The company has demonstrated steady growth in its top and bottom lines over the past three years.
Revenue grew from $4.2 billion in 2021 to $5 billion in 2023 with net income climbing from $464 million to $590.1 million over the same period. The business also generated an average-annual free cash flow of $365 million, showcasing Lennox’s ability to generate dependable free cash flow that can be used to pay out dividends.
The climate-control specialist has dutifully paid out quarterly dividends since 2000 and most recently increased its quarterly dividend by 4.5% year over year to $1.15 per share back in May.
The company has continued its strong financial streak in the first half of 2024. Sales inched up just 1.5% year over year to $2.5 billion, but operating income climbed 16.4% to $486.9 million. Lennox’s net income stood at $370.2 million, 17.4% higher than the net income of $315.2 million a year ago. Free cash flow came in at $99 million for the first half of this year, more than triple of what was generated in the previous-corresponding period.
Lennox also reaffirmed its full-year revenue guidance of 7% year-over-year growth and revised its earnings-per-share (EPS) guidance upwards. The company now expects EPS to come in between $19.50 to $20.25, up from the previous range of $19 to $20.
Management has updated its set of long-term targets for 2026 with an increase in targeted revenue to a range of $5.4 billion to $6 billion, up from between $5 billion to $5.5 billion previously. The company also expects to convert around 90% of its net income to free cash flow, thus continuing its track record of healthy free-cash-flow generation.
This increasing free cash flow should continue to fund higher dividends, making Lennox an ideal stock for income investors. The company intends to expand its distribution network and utilize generative artificial intelligence (AI) within its products. These plans should help to cement its continued growth and attract a wider range of customers to use its products.
Tractor Supply Company(NASDAQ: TSCO) is the largest rural-lifestyle retailer in the U.S. The company owns and operates 2,254 Tractor Supply stores in 49 states and employs more than 50,000 staff. Tractor Supply can provide an attractive mix of both growth and dividends as evidenced by its impressive financial performance over the last couple of years.
Sales went from $12.7 billion in 2021 to $14.6 billion in 2023 with net income climbing from just under $1 billion to $1.1 billion over the same period. The retailer also churned out an annual-average free cash flow of $558 million over these three years.
The steady increase in profits and cash flows has enabled Tractor Supply to almost double its annual dividend from $2.08 in 2021 to $4.12 in 2023. Notably, the business has increased its annual dividend without fail since 2010, with the latest-quarterly dividend coming in at $1.10 per share, up from $1.03 a year ago.
The retailer continued its streak of good performance by reporting higher revenue and profits for the first half of 2024. Revenue edged up 2.1% year over year to $7.6 billion with operating income improving by 2.6% to $824.6 million. Net income improved by 3.2% to $623.3 million, and the business churned out a positive free cash flow of $467.5 million, 8% higher than a year ago.
For the first half of this year, Tractor Supply opened 38 stores along with seven new Petsense by Tractor Supply stores. There could be further room for growth in both profits and dividends. Management upped its long-term store target to 3,000 in the U.S. alone, 200 more than its original target, as it believes that there is still room for more stores to open to serve the rural community. Store openings should ramp up over the years with 80 slated for this year and 90 in the next.
Earlier this year, Tractor Supply also revamped and enhanced its Neighbor’s Club loyalty program with more personalized perks to pique shoppers’ interest and get them to continue spending. There is also a lower threshold to achieve the program’s Preferred status, and higher-tier members can accumulate points at a faster clip. Such changes should increase customer loyalty and get existing customers to spend more.
With around 30 million members and counting, Tractor Supply looks poised to do well over the medium term.
ResMed(NYSE: RMD) is a market leader in sleep apnea and respiratory-care solutions, and sells its products and devices in more than 140 countries. The company offers digital solutions to help people manage chronic conditions such as sleep apnea and chronic respiratory diseases by tapping into technology-driven integrated care.
Growth has been impressive over the past three years. Revenue jumped from $3.6 billion in fiscal 2022 (ended June 30) to $4.7 billion in fiscal 2024. Net income surged from $779.4 million to $1 billion over the same period. Free cash flow has also improved by leaps and bounds, going from just $216.3 million in fiscal 2022 to $1.3 billion in the most recent fiscal year.
Management believes that the markets they are serving are just the tip of the proverbial iceberg. There are more than a billion people suffering from sleep apnea along with around 480 million afflicted with chronic obstructive pulmonary disease (COPD) and close to 860 million with insomnia. Together, these 2.5 billion people form the total-addressable market (TAM) for ResMed as these three chronic illnesses are the most prevalent globally.
ResMed also recently released its 2030 growth outlook, which targets high-single-digit year-over-year revenue growth and expects earnings to grow faster than revenue. One of the pillars underlining this ambitious strategy is the use of AI and machine learning to enhance therapy performance and increase consumer appeal. The company will also invest 7% of its revenue into research and development to create and deliver a fully integrated digital ecosystem to deliver effective health solutions for home use.
With these plans, ResMed looks well-positioned to continue growing as it utilizes its strengths to tap on a huge market for sleep apnea, COPD, and insomnia.
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Royston Yang has 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.
