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Get growth and income too

Stocks such as Coke, GE, Lilly and Wells Fargo offer yields a lot higher than the S&P 500 as well as solid growth prospects.

By Michael Sivy, Money Magazine editor-at-large

NEW YORK (Money) -- Everyone understands the advantages of growth investing. Bet on a company with a hot new technology or a great retailing idea, and as the business expands, the share price will soar.

Income investing is also easy to get. Buy shares in a company that may not have a lot of growth potential but that throws off a lot of cash and you'll be able to live large on dividends.

But what exactly is a growth-and-income investment? And what specific advantages does it offer?

The definition is easy enough: A growth-and-income stock has moderate but solid prospects for earnings growth and also offers a yield somewhat higher than the S&P 500.

The advantages of such stocks are not as obvious as for pure growth or pure income investments. But analysis shows that such stocks offer an excellent balance between long-term returns and reduced risk. They also help to keep you ahead of inflation.

With today's low taxes on dividends, it doesn't matter whether your return comes from capital gains or income. A stock with 10 percent earnings growth and a 3 percent yield figures to return just as much as a stock with 13 percent earnings growth.

Pure growth stocks also tend to trade at high price/earnings ratios. They aren't likely to benefit much from further multiple expansion, but their P/Es can collapse if there's unexpected bad news.

Growth-and-income investments, by contrast, are likely to be undervalued, relative to their return prospects. And an out-of-favor stock with an average P/E can rebound if its prospects improve.

In short, growth-and-income investments offer excellent long-term return potential that is often unappreciated. And they are likely to be less risky.

Here are four such stocks from the Sivy 70 that pay more than 2.9 percent or more.

After losing ground to PepsiCo for nine years, Coca-Cola (Charts) looks ready to become more competitive thanks to international expansion and new products that use less sweetener. And Coke still has the world's best brand name.

General Electric (Charts) remains a highly successful, well-diversified conglomerate that's now surprisingly cheap and pays a 3.2 percent dividend. In addition, GE has often held up better than other blue chips in weak markets.

Eli Lilly (Charts) has lagged other major drug stocks and appears undervalued by as much as 20 percent. The company has had problems with a couple of its drugs recently, but appears to have a strong lineup going forward. In addition to erectile disfuncion drug Cialis, Lilly has new treatments for depression and diabetes.

And among the major banks, Wells Fargo (Charts) (WFC) has solid growth prospects. The stock has also dropped by a couple of dollars over the past few weeks because of fears about subprime loan defaults. Such loans, however, are only a tiny part of Wells Fargo's total portfolio.


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Sivy 70: America's best stocks Top of page