Over the long term, growth stocks usually provide a better total shareholder return than income stocks. As an added bonus, they usually grow their dividend at a much faster rate too, making them good income stocks in the long run.
Here are three businesses trading at reasonable valuations that have a long growth runway and a grossed-up yield of at least 2.25%:
Challenger Ltd (ASX: CGF)
Challenger is Australia's dominant provider of annuities with a market capitalisation of $6.1 billion. It's growing annuity sales at a tremendous rate and in its latest update it revealed sales were up by 45% over the prior corresponding period.
I expect continuing success of sales growth over the coming years as annuities become more popular with people in retirement looking for a guaranteed income.
The number of retirees between the ages of 65 and 85 years old is forecast to grow substantially in the coming years. This is Challenger's target market.
Challenger is trading at 16.3x FY17's estimated earnings with a grossed-up dividend yield of 4.34%.
Altium Limited (ASX: ALU)
Altium is an electronic PCB software provider which allows companies such as NASA, Boeing and BMW to design products of the future.
Altium has experienced enormous growth over the last five years, delivering a total shareholder return of 641.5%. But I think there's more to come, the 'internet of things' revolution is only just getting started.
It has a cheaper and supposedly better product than its competitors, so it's stealing market share. Management is so confident of its product that it has a goal to double revenue to $200 million revenue by 2020.
Altium's profitability for each dollar it earns is growing too, so doubling revenue should more than double profits. The earnings before interest, tax, depreciation and amortisation margin increased from 28.3% to 29.3% in FY16.
Altium is trading at 27.1x FY17's estimated earnings with partially franked dividend yield of 2.37%.
Seek is Australia's largest job portal, it also has ownership of other job sites that are market leaders in their respective countries. There is a sizeable potential here because many of those countries have larger populations than Australia.
During FY16 it grew both revenue and the dividend by 11%, which is pretty good considering Australia's economy is slowing. As long as Seek can handle heavyweights LinkedIn and Indeed, then it should continue performing well.
Seek is trading at 23.7x FY17's estimated earnings with a grossed up dividend yield of 3.86%.
Foolish takeaway
Of these three growth stocks I think Challenger could do best over the short to medium term.
If interest rates do rise, it will increase the return that Challenger can get on its fixed interest investments. This will allow Challenger to offer annuities with higher income which will be more attractive and likely boost sales.
