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3 top growth and income stocks to generate 10% per annum

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In a stark warning for upcoming retirees and all investors, Reserve Bank of Australia Governor Glenn Stevens was quoted in Fairfax media recently as saying:

“The key question is: how will an adequate flow of income be generated for the retired community in the future, in a world in which long-term nominal returns on low-risk assets (i.e., bonds) are so low?”

Mr Stevens has also been very vocal recently about the risks shareholders are running by chasing income, particularly in well-known blue chips like Commonwealth Bank of Australia (ASX: CBA), and Westpac Banking Corp (ASX: WBC).

Fairfax further quoted financial planner Mark Draper as stating that returns of 10% per annum were now confined to history and unlikely to be repeated in the next three years.

(Returns of 10%p.a. combining yield and capital growth have traditionally been a reasonable target for older investors).

Cash deposit returns and bonds definitely aren’t appealing – the CEO of Challenger Ltd (ASX: CGF) was also quoted in Fairfax as stating that the returns on $1 million in assets would work out to around $1,297 per fortnight – the same as the aged pension.

So what’s an investor to do?

Well, readers seeking to bump up their total returns in the next few years could consider buying these three growth shares:

Lifehealthcare Group Ltd (ASX:LHC) – yields 3.2%, forecast profit growth in the ‘low-double digit range

Healthcare equipment sales company Lifehealthcare Group has had a strong start to listed life on the ASX, with double-digit revenue and profit growth, and more of the same expected this year.

In addition to the defensive characteristics associated with the healthcare sector, Lifehealthcare has plenty of room for growth and a 3.2% dividend means shares only need to increase in value by 6.8% per annum, to achieve a 10%p.a. total return.

Although shares have already risen 49% in the past 12 months, they remain fairly priced and I believe investors are likely to be satisfied with Lifehealthcare’s returns over the next few years.

Challenger Ltd (ASX: CGF) also has a lot to offer investors – who better to invest in for your retirement than those who help people invest for their retirement?

The demand for annuities and wealth management services is rising strongly, and Challenger has rapidly grown Funds Under Management and annuity sales growth in recent years.

With strong sales growth, mandatory superannuation contributions rising and increasing awareness of the challenges retirees face, Challenger has powerful long-term tailwinds and I expect the business to deliver profit growth in the full year 2015 results.

With a 3.9% yield (70% franked), Challenger shares must appreciate 6.1% per annum to deliver a 10% total return, and given the coming superannuation boom I don’t expect this to be too difficult – competition from the likes of Macquarie Group Ltd (ASX: MQG) and Yellow Brick Road Holdings Ltd (ASX: YBR) notwithstanding.

G8 Education Ltd (ASX: GEM) – yields 5.8% fully franked, high-double digit profit growth

Shares in G8 have been slammed recently over cost increases and fears of government legislation impacting the childcare business. In addition to these risks, G8 faces also faces potential risks from increased interest rates, greater competition, and increases in unemployment over the medium term.

While G8 shares aren’t right for every investor, they are also the most likely to deliver on the 10% per annum target over the next 3-5 years.

Net profit after tax grew by a staggering 70% in 2014, and while this feat will be difficult to replicate I believe investors can expect double-digit profit growth from G8 in future years as well.

A 5.8% dividend means that shares need only grow in value by 4.2% per annum and I believe G8 is likely to achieve this over the next few years, increased regulation notwithstanding.

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Motley Fool contributor Sean O'Neill owns shares in Lifehealthcare, Yellow Brick Road, and G8 Education. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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