The rainbow appeared over Prince’s house hours after he passed away.

With Prince’s death fresh in our minds (God rest his soul), I found one of his quotes that can be translated to investing: “The most important thing is to be true to yourself, but I also like danger. That’s what’s missing from pop music today. There’s no excitement or mystery.”

Image source: acgoodyear@twitter

The first point ‘being true to yourself’ is acting according to what you believe in. As investors, we all have our own comfort level and tend to place our money towards assets that we have conviction in. When it comes time to click the buy button on a new investment, we feel comfortable that that particular stock fits our goals or investing philosophy. 

When Prince says that he likes danger, he is looking for excitement in something that goes beyond the ordinary or the predictable. As an investor, strong price appreciation is exciting. Many times, investors will take on more risk to reap the higher rewards. 

The combination of dividends and above average price appreciation provides investors with some comfort in the form of regular payments. So, if you are a dividend investor and believe in only buying stocks that have yield to be true to your investing beliefs, then the stocks that I will discuss are likely to be of interest to you. The excitement comes from the potential for above average price appreciation to go along with the dividends.

There is some danger since there are high earnings expectations for these companies. The stocks could fall sharply if the companies don’t meet the higher expectations. That danger is the extra risk that investors are willing to take on to reap the higher rewards. 

There is nothing wrong with investing in solid, relatively predictable dividend stocks. However, investors can also add some excitement to their portfolio by buying dividend-paying companies that have above average growth, which typically drives above average stock appreciation.

AbbVie (ABBV) has a strong dividend yield of 3.7%. The company has compelling expected growth to go along with that yield. Consensus estimates show that AbbVie is expected to grow earnings at about 16% this year and 19% next year. That strong growth is significantly higher than the S&P 500’s expected growth of 0.5% for 2016 and 13% for 2017. 

AbbVie is also attractively valued as the stock is trading at 10X next year’s expected EPS. That is a better valuation than Pfizer (PFE) and Merck (MRK) which are trading at 13X and 15X next year’s expected EPS respectively. Therefore, I would expect AbbVie to outperform since the company has a low valuation along with above average earnings growth to drive the stock. 

The company’s success is being driven to a large extent by Humira, which comprises about 61% of total revenue. AbbVie has 11 additional drugs on the market that comprises the other 39% of revenue. Humira’s key to success is a result of the numerous conditions that the drug treats: rheumatoid arthritis, JIA, PsA, AS,CD, HS, UC, and Ps. 

Humira’s sales outlook is still expected to be strong through 2019 because any competitive biosimilar drugs are not likely to approved until around 2018. This is likely despite Humira’s patent expiring this year. The company expects Humira’s sales to peak in 2018, when some competition creeps in. So, AbbVie is likely to experience at least 3 more years of strong sales for Humira. 

The 3 year window gives the company time for the development of its pipeline. AbbVie has 9 compounds in Phase III development with others in earlier stages. Some of the pipeline drugs treat multiple conditions. So, I think that the company will perform well over the long-term as more approvals hit the market. 

I expect AbbVie’s stock to outperform the market with approximate annual gains of 17% to 18% over the next 2 years, driven by earnings growth. 

Home Depot (HD) is another strong dividend growth stock with a yield of 2%. I realize some investors avoid companies that pay dividends of less than 3%, but Home Depot is a solid company with above average growth. So, if you want more than just income, Home Depot can also give investors above average price appreciation along with the dividends.

Home Depot is riding the strength of the home remodeling market. The remodeling market is expected to grow steadily over the next few years. This steady growth is being supported by growth in existing home sales. Existing home sales increased 5.1% in March sequentially and 1.5% year-over-year. This increased activity is likely to increase the demand for Home Depot’s appliances, lumber, and other supplies as homeowners improve their dwellings to suit their needs. 

As a homeowner, I understand that there is always something to improve or replace in my home at any given time. Wives are likely to remind their husbands to get over to Home Depot to buy the necessary supplies to get these things done. Or they will at least hire a contractor for the projects that can’t be handled by themselves. Home Depot has strong contractor services for a variety of projects. 

Home Depot is likely to sustain above average stock growth for investors due to the company’s double-digit earnings growth. The company is expected to grow earnings at about 15% this year and 14% next year according to consensus. 

The stock is trading at a slight premium with a forward PE of 19 as compared to the S&P 500’s forward PE of 17. However, investors will tend to give HD a premium price for its above average growth. Therefore, I think that the stock can grow at about 14% annually, approximately in-line with earnings growth. 

Conclusion

If you share the same philosophy that Prince has with being true to yourself, but you want to add a little excitement, then consider adding stocks like these to your portfolio. AbbVie and Home Depot have proven to be successful with above average growth. These companies can provide you with dividends for income, but also give you strong price appreciation. The result for investors will be a strong total yield over time. 

If you add the dividend yield to the potential price appreciation, AbbieVie and Home Depot have the potential to give investors a total annual yield of about 21% and 16% to 17% respectively over the next 2 years. That is likely to outperform the total returns of dividend paying companies that are only expected to grow at average rates.