The honest answer to that question is: it depends. Deploying any amount of capital hinges on your appetite for risk, your need for regular cash flow, or desire for long-term capital appreciation.
With that in mind, here are two stocks that I believe are relatively low risk and offer either handsome dividends or attractive growth rates.
Insurance giant Aviva (LSE:AV) seems particularly well-positioned to deliver a sustainable dividend for the foreseeable future. Analysts expect the company to offer an 8.2% dividend yield next year based on today’s price. At the moment, the stock offers a dividend yield of 7.63%, much higher than the average dividend rate offered by other FTSE 100 stocks.
If you take a look back at the share performance, Aviva will likely strike you as one of the most underrated income opportunities on the FTSE 100 at the moment. The share price has been flat since the global financial crisis ended in 2009. However, underlying profits and cash have both expanded over the past decade. In other words, the share price doesn’t reflect the underlying business.
At the moment, Aviva has enough cash to cover the annual dividend 1.7 times over. Meanwhile, management has kept the dividend payout ratio low at 52%. That makes the dividend particularly robust.
Investors can snap this share up at an attractive valuation right now. The price-to-earnings ratio (6.7) and price-to-sales ratio (0.42) both indicate that the shares have been oversold.
On the other end of the valuation spectrum is a stock that pays a mediocre dividend and trades at a relatively richer valuation: Kainos Group plc (LSE:KNOS). The Belfast-based software company offers a mere 1.18% forward dividend yield, which is considerably lower than the FTSE 100 average. Perhaps this is because investors have pushed this stock to a price-to-earnings ratio of 38.5.
However, I believe the valuation seems a lot more reasonable when you consider Kainos’ tremendous growth potential. Most high-tech companies trade at richer valuations because of their growth rates or profit margins.
Over the past year, Kainos’ quarterly revenue has surged 29.3%. Meanwhile, return on equity was last reported at 37.4%. This implies that the share’s price-to-earnings growth (PEG) ratio is close to 1, a sign of fair value.
Selling enterprise software is a lucrative and stable business with magnified profit margins. If management can keep up this pace of growth, Kainos could well be a multibagger over time. Perfect for investors seeking growth-at-reasonable prices.
The two stocks mentioned above offer investors strikingly different opportunities. While Aviva offers a higher dividend, its share price has been pretty much flat for the past few years. Meanwhile, Kainos offers a meagre dividend yield but shareholders have been handsomely rewarded with double-digit percentage gains for the past few years.
Most investors need to make a choice between either growth or regular income, which is why I would deploy £10,000 in either Aviva or Kainos for the best dividend yield or growth potential.
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VisheshR has no position in any of the shares mentioned. The Motley Fool UK has recommended Kainos. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
Motley Fool UK 2019