Today’s high rate of inflation is a great reminder that your savings account will need to grow just to keep your buying power where it is. One of the best ways to do that may be dividend growth stocks and growth stocks, which, after the most recent tech sell-off, are currently trading at better valuations.
Times of market turmoil can be uncomfortable, but these are often the best times for long-term investors to put their money to work. Here are the two growth stars that have a competitive advantage, giving them the staying power and also a pathway to making today’s investors rich years out into the future.
Microsoft makes for an excellent core holding for both defensive and aggressive investors. Its legacy operating system is an entrenched part of most personal computers around the world, and its software franchises that include the Dynamics enterprise resource planning suite and the Office productivity suite are cash cows that have been growing at a steady pace. Meanwhile, Microsoft’s number two position in cloud computing gives it a rising growth star, with the Azure cloud platform seeing growth of 46% this past quarter. Microsoft has also been making thoughtful acquisitions over the last few years under the CEO Satya Nadella, into the social media space with LinkedIn, developer tools with GitHub service, and some video games, with acquisitions of a few game studios culminating in the most recent offer to purchase Activision Blizzard.
Microsoft’s sprawling empire so far has a nice combination of growth stars, cash cows and emerging services and products, compounding your investment dollars at a very high rate of return on invested capital.
Microsoft may not look like a cheap stock at 31 times earnings, but when you think about the fact that it has a higher credit rating than the United States government, and that the 30-year United States Treasury bond only yields about 2.25% today, Microsoft’s 3.3% earnings yield looks great. That is especially when those earnings are continuing to grow over 20% each year despite the Microsoft’s huge size.
You might have heard that we have a semiconductor shortage, because of the increase in digitization that’s coming out of the Covid pandemic. The importance of these chips and chip-production has never been higher than it is today, as evidenced by the developing countries set to offer billions in subsidies to chip businesses just to keep some of the chip capacity in their own countries. Yet because of the wider tech sell-offs, the semiconductor index has decreased about 14% to start the year off.
The sell-off has been harder on the higher-multiple chip stocks such as ASML Holdings, which is down 18.6% for the year and 27.4% from its all-time highs that was set this past summer. ASML still deserves a high multiple, given that it does have a monopoly on extreme ultraviolet lithography — the main technology to creating leading-edge chips.
EUV tools have only began to be utilized a few years ago for the leading-edge logic chips, and all the main DRAM memory businesses are now starting to use EUV on their current and future nodes. So, we’re still in the early stages of EUV usage.