Forget dividend shares. Are growth stocks the real path to a lucrative second income?

forget dividend shares. are growth stocks the real path to a lucrative second income?

Forget dividend shares. Are growth stocks the real path to a lucrative second income?

When discussing a second income, I talk about dividend stocks a lot. I’m not going to sugar coat it – I like them because the returns are predictable. I often know months before what payouts I can expect. As such, I can plan my finances accordingly.

That’s the beauty of dividends.

But all that stability and reliability comes at a price. While other stocks — that is, growth stocks — may be less predictable, they sometimes deliver greater returns. The trick to evaluating such a stock’s reliability is comparing its past performance with its future prospects. Some of the best are new companies with little history but a promising future. Others have a 100-year+ track record of success but no guarantee it will continue.

Consider the following two FTSE 100 shares.

Experian

Dublin-based Experian (LSE: EXPN) is one of the most popular credit reporting firms in the world. It faces some competition from US firm Equifax and to a lesser degree TransUnion, but is a leader in the EU market.

Recently it resurfaced on my radar following positive ratings from several brokers, including Barclays, Jefferies, Shore Capital and Morgan Stanley. That gives me a lot of confidence in its future performance.

Experian also ticks all the boxes when it comes to past performance. It’s up 28% in the past year and 55% over five years, with annualised returns of 9.22%. Looking over the past decade is even more impressive, up 262% with annualised returns of 13.7%. That’s significantly higher than the FTSE 100 average of 7.5%.

Naturally, being a growth stock, it has an insignificant dividend yield of 1.26%. So if growth doesn’t materialise, it won’t provide any additional returns. But more concerning, the share price is near an all-time high and overvalued by 9.8% based on future cash flow estimates. Plus, the price-to-earnings (P/E) ratio is a lot higher than the industry average.

This doesn’t negate the future prospects but could result in a mild short-term correction. Yet I would still consider it a good long-term buy.

Antofagasta

Founded in Chile in 1888, Antofagasta (LSE: ANTO) is a long-established mining company that’s done well recently. It’s up 70% in the past year alone, and 196% over five years. That’s a 24.2% annualised return! Even over 20 years, annualised returns are high at 13.8%.

That’s very promising past performance – but will it continue?

The miner’s key product is copper, a metal that’s vital for almost all implementations of renewable energy. Anybody who hasn’t been living under a rock knows that should mean profit. The International Energy Agency (IEA) predicts that renewable energy will soon surpass coal to become the world’s top source of electricity.

But mining is a high-risk industry. Antofagasta faces not only stiff competition from fellow miners but significant geopolitical risks. It operates in countries that face threats both internally and from neighbouring nations. Its staffing, logistics, and supply chain operations all rely on the stability of several regions, so keeping profits flowing is a careful balancing act.

As they say – no risk, no reward!

While past performance is good, I don’t think now is the time to consider this one. Barclays, HSBC and JP Morgan have all reduced their positions in Antofagasta in the past month. While it ticks the past performance box, future growth is uncertain.

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    JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. HSBC Holdings is an advertising partner of The Ascent, a Motley Fool company. Mark Hartley has positions in Barclays Plc and HSBC Holdings. The Motley Fool UK has recommended Barclays Plc, Experian Plc, and HSBC Holdings. 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.

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