Wall Street has always insisted that investors must choose sides.

You can own growth stocks, which supposedly offer exciting capital gains but little current income. You can own dividend stocks, which provide income but are often dismissed as slow, boring businesses unlikely to produce spectacular long-term returns.

This is another artificial distinction that makes investing more complicated than it needs to be.

Some of the best long-term investments combine both characteristics. They grow earnings at an attractive rate, pay shareholders a meaningful dividend, and increase that dividend as the business becomes more profitable.

The real objective is not merely finding growth or income. We want to find growth and income at a price that leaves room for substantial future returns.

One practical way to do that is to combine the PEG ratio with dividend yield and dividend growth. It is a straightforward framework that can be applied quickly using the screening tools in Benzinga Pro.

Peter Lynch’s Favorite Rule of Thumb

Peter Lynch helped popularize the PEG ratio with a simple observation: “The P/E ratio of any company that is fairly priced will equal its growth rate.”

That sentence contains more useful investment wisdom than most 100-page Wall Street strategy reports.

A price-to-earnings ratio tells us how much investors are paying for each dollar of current earnings. It does not tell us whether those earnings are growing rapidly enough to justify the price.

A company trading at 20 times earnings may be wildly overpriced if profits are growing by only 5% annually. Another company trading at the same 20 times earnings may be reasonably priced if earnings are growing by 20%.

The P/E ratio is the same.

The opportunity is not.

The PEG ratio addresses that problem by dividing the P/E ratio by the expected earnings growth rate.

A company trading at 15 times earnings with expected earnings growth of 15% has a PEG ratio of 1. If expected growth is 20%, the PEG ratio falls to 0.75. If earnings are growing by only 5%, the PEG ratio rises to 3.

Lower is generally better.

Lynch viewed a P/E ratio equal to the growth rate as a reasonable approximation of fair value. A P/E ratio substantially below the growth rate could indicate an undervalued stock. A P/E ratio far above the growth rate suggested investors might be paying too much.

A PEG ratio below 1 can indicate an attractive situation. A PEG ratio below 0.5 becomes especially interesting, provided the growth assumptions are realistic and the balance sheet is not held together with accounting tape and investment banker optimism.

That qualification matters.

The PEG ratio is only as useful as the growth estimate placed in the denominator. Wall Street analysts have never met a spreadsheet assumption they could not push beyond the limits of common sense.

A company growing earnings by 25% today will not necessarily grow at that pace forever.

Competition arrives. Markets mature. Costs increase. Customers change their minds. Management eventually makes a stupid acquisition because sitting on excess cash apparently causes discomfort in executive suites.

Growth estimates must be examined rather than merely accepted.

Historical earnings growth matters. Recent earnings momentum matters. Management guidance matters. Industry conditions matter. Analyst forecasts can be useful, but they should be treated as estimates rather than sacred texts delivered from a mountain.

Lynch was particularly attracted to moderately fast growers. He often looked for companies capable of increasing earnings at roughly 20% to 25% annually, especially when they operated in industries Wall Street did not consider exciting.

Those companies could grow for years without attracting the valuation insanity surrounding the latest fashionable technology or consumer trend.

We are looking for companies growing faster than the market realizes, but we do not want to pay prices that assume flawless execution for the next decade.

Why Dividends Make the Calculation Better

Dividends make the PEG calculation even more useful.

A dividend is not merely a quarterly payment deposited into a brokerage account. It is a direct transfer of corporate cash to the owners of the business.

Dividends also tell us something about the quality of earnings and management’s attitude toward shareholders.

A company can manufacture an adjusted earnings number. Management can exclude stock compensation, restructuring charges, acquisition expenses, and almost anything else it would prefer investors to ignore.

Paying a dividend requires actual cash.

A company that consistently pays and raises its dividend is telling us that management believes the business can generate enough free cash flow to fund operations, invest for growth, and still return capital to shareholders.

That does not make every dividend safe. Plenty of companies have maintained dividends right up until the moment they cut them.

Investors must examine the payout ratio, free cash flow coverage, debt levels, interest expense, and management’s historical behavior. A dividend financed with borrowed money is not income. It is financial theater.

The Dividend-Adjusted PEG Ratio

Lynch recognized that the traditional PEG ratio could undervalue companies producing both earnings growth and dividend income. He refined the calculation by adding dividend yield to the earnings growth rate.

The resulting calculation is often called the dividend-adjusted PEG ratio, or PEGY ratio.

The formula is: P/E ratio divided by earnings growth plus dividend yield.

Consider a company trading at 15 times earnings, growing earnings by 10% annually, and yielding 3%.

The traditional PEG ratio is 1.5. That does not look especially attractive.

Add the 3% yield to the 10% growth rate and the combined figure becomes 13%. Dividing the P/E ratio of 15 by 13 produces a dividend-adjusted PEG ratio of approximately 1.15.

The stock is not screamingly cheap, but the valuation looks far more reasonable once the dividend is recognized.

Consider another company trading at 12 times earnings, growing at 10%, and yielding 4%.

The traditional PEG ratio is 1.2.

The dividend-adjusted PEG ratio is approximately 0.86.

That gets my attention.

Why Dividend Growth Matters More Than Yield

The dividend yield alone is not enough.

Investors routinely make the mistake of buying the highest yielding stocks they can find. This works wonderfully until the company cuts the dividend and the share price falls off a cliff.

A 9% yield can quickly become a 0% yield accompanied by a 40% capital loss.

The better approach is to search for a reasonable starting yield supported by earnings growth, free cash flow, and a history of dividend increases.

Dividend growth is where the real magic begins.

A company yielding 2.5% today may appear less attractive than one yielding 6%. The comparison changes dramatically if the first company raises its dividend by 10% annually while the second company never increases its payment.

At a 10% dividend growth rate, the annual payment doubles approximately every seven years.

Investors who hold the shares long enough can develop an enormous yield on their original purchase price.

The growing dividend is usually accompanied by growing earnings. Over time, rising earnings and rising dividends tend to pull the share price higher.

This gives investors three potential sources of return.

They receive the current dividend.

They benefit from future dividend increases.

They participate in capital appreciation created by higher earnings.

The most attractive candidates usually have payout ratios low enough to support continued dividend growth.

A company earning $5 per share and paying a $2 dividend has a 40% payout ratio. If free cash flow remains strong and earnings continue growing, management has room to raise the dividend.

A company earning $5 and paying a $4.75 dividend has very little margin for error. A temporary decline in profits could force management to borrow money, sell assets, or cut the payment.

Dividend growth investors should look for both willingness and capacity.

The willingness comes from management’s history of raising the dividend.

The capacity comes from earnings growth, free cash flow, manageable debt, and a conservative payout ratio.

Building the Screen

The screen is easy to build in Benzinga Pro.

Start with profitable companies. A P/E based strategy is not particularly useful when there is no E.

The first filter is the PEG ratio. Benzinga Pro allows investors to screen for PEG as a standalone fundamental measurement.

I would begin with a PEG ratio below 1.

More aggressive investors can lower the maximum to 0.75 or 0.5. The lower the acceptable ratio becomes, however, the more likely the results will include cyclical companies whose recent growth rates are temporarily inflated.

The next filter is dividend yield.

A minimum yield of 2% is a reasonable starting point. Income investors may choose 3% or 4%, but pushing the minimum too high can fill the screen with troubled companies and potential dividend cuts.

Next, look for positive expected earnings growth over the next three to five years.

A 5% minimum is appropriate for mature dividend companies. A 10% minimum will produce a smaller list with more meaningful growth potential.

The screen should also include a manageable payout ratio.

For most corporations, I prefer an earnings payout ratio below 60%. Below 50% is even better because it leaves greater room for reinvestment and future dividend increases.

Different rules apply to real estate investment trusts, business development companies, and master limited partnerships. These structures distribute a larger portion of their cash flow, so investors should use funds from operations, distributable cash flow, or another industry-appropriate measure instead of ordinary net income.

Debt must also be considered.

A company with rapid earnings growth, a high dividend, and a low PEG ratio may still be a terrible investment if the balance sheet is overloaded with debt.

A practical Benzinga Pro screen might include:

PEG ratio below 1. Dividend yield above 2%. Expected earnings growth above 5%. Positive earnings per share. A P/E ratio below 20. A payout ratio below 60% for ordinary corporations.

The results can then be sorted by PEG ratio or dividend yield and placed on a watchlist.

The screen is only the beginning.

Once we have the list, we must examine the business, balance sheet, dividend history, and the reason the stock is cheap.

3 Stocks That Combine Growth and Income

Bank OZK, MPLX, and Levi Strauss are three very different companies that become interesting when we combine valuation, growth, yield, and dividend growth.

None is a perfect stock.

Perfect stocks usually exist only in promotional materials and the imagination of investment bankers.

Bank OZK

Bank OZK (NASDAQ:OZK) is the traditional value and dividend growth stock of the group.

The Little Rock, Arkansas, bank has developed a national lending platform through its real estate specialties group, which finances large commercial real estate projects across major U.S. markets.

That business has produced exceptional returns over the years, although it has also caused investors to periodically run around in circles screaming about commercial real estate exposure.

Bank OZK’s lending model has historically been more conservative than the headlines suggest. The bank generally requires substantial borrower equity, maintains disciplined loan-to-cost ratios, and structures transactions to protect its capital.

Management has also demonstrated a willingness to reject business when pricing or terms become unattractive.

Near-term earnings growth has slowed as elevated repayments in the real estate specialties portfolio have reduced loan balances. The market appears to be assuming that meaningful growth will never return.

That may prove too pessimistic.

Management has been expanding corporate and institutional banking operations and developing lending businesses outside traditional commercial real estate. As those platforms grow, Bank OZK should become a more diversified institution with additional sources of loan and revenue growth.

The dividend record is where the story becomes especially interesting.

Bank OZK offers a yield approaching 4% and has established one of the strongest dividend growth records in the regional banking industry.

A company cannot produce that type of record without sustained profitability, disciplined capital allocation, and a management team that takes shareholder returns seriously.

Bank OZK’s short-term growth rate is not spectacular, so investors should be careful about blindly applying a one-year PEG calculation.

The opportunity rests on the combination of a reasonable valuation, a generous yield, continued dividend growth, and the possibility that earnings accelerate as loan repayments normalize and newer businesses expand.

The primary risk is obvious.

A severe commercial real estate downturn could create credit problems, particularly among large construction and development loans. Investors must monitor criticized assets, nonperforming loans, loan-to-cost ratios, and individual project performance.

Bank OZK has spent decades demonstrating that it understands those risks better than most of the people commenting on them.

MPLX

MPLX (NYSE:MPLX) is a completely different animal.

The master limited partnership, controlled by Marathon Petroleum, owns pipelines, storage facilities, gathering systems, processing plants, and other midstream energy infrastructure.

MPLX does not need oil and natural gas prices to rise dramatically to make money. Much of its cash flow is generated from fees earned for transporting, gathering, processing, and storing energy products.

That distinction matters.

Exploration and production companies can experience enormous swings in profits when commodity prices move. Midstream operators tend to have more stable cash flows because they are paid based on volumes and contractual arrangements.

MPLX offers a distribution yield above 7%.

That is a substantial starting return before considering future distribution growth.

The partnership has produced strong distributable cash flow coverage and continues investing in natural gas and natural gas liquids infrastructure.

A conventional PEG ratio does not always provide the best analysis of MPLX because accounting earnings can be distorted by depreciation charges associated with large infrastructure assets.

Distributable cash flow is the more useful measurement.

When we combine a yield above 7%, potential distribution growth, and expanding cash flow, the total return picture becomes compelling.

Demand for natural gas should remain supported by liquefied natural gas exports, power generation, industrial activity, and the enormous electricity requirements of data centers.

MPLX does not need to determine which artificial intelligence company wins the technology race. It can make money helping deliver the energy required to keep the servers running.

The risks include leverage, large capital spending programs, construction delays, and exposure to Marathon Petroleum’s strategic decisions.

MPLX also issues a Schedule K-1, which will frighten away investors who apparently believe tax forms are more dangerous than losing money.

That complexity is one reason the units can continue offering such an attractive yield.

Levi Strauss

Levi Strauss (NYSE:LEVI) is the growth stock of the group.

The company owns one of the most recognizable consumer brands in the world. Levi’s has been selling blue jeans since the 19th century, yet management is repositioning the company for growth among younger consumers and across a broader range of clothing categories.

This is not merely a bet that people will suddenly need more basic jeans.

Levi Strauss is expanding its direct-to-consumer business, increasing sales of tops and non-denim bottoms, introducing premium products, and broadening the brand into a lifestyle and apparel company.

Direct sales provide greater control over pricing, inventory, brand presentation, and customer relationships.

The company has also been improving margins and earnings while returning more cash to shareholders.

Levi Strauss offers a moderate earnings multiple, a current dividend, and room for future dividend increases if earnings continue growing.

That combination is exactly what we are looking for.

The stock also demonstrates why dividend growth can matter more than a huge initial yield.

A yield in the 2% range will not cause income investors to sprint across the room. A rising dividend, however, tells us that management has confidence in future cash generation.

Continued dividend growth can produce a much more attractive yield on the investor’s original purchase price.

The risks are primarily related to consumer spending, fashion trends, tariffs, inventory management, and execution.

Apparel is a difficult business. Consumers are unpredictable, merchandise can become obsolete, and retailers are forced to compete constantly through promotions and markdowns.

The strength of the Levi’s brand provides some protection. Very few apparel companies possess a brand with comparable global recognition and cultural durability.

Three Roads to the Same Destination

Bank OZK, MPLX, and Levi Strauss approach the growth and income combination from different directions.

Bank OZK is a value and dividend growth opportunity. Investors receive a generous yield, a strong history of dividend increases, and the possibility of renewed earnings growth.

MPLX provides the highest current income. The units yield more than 7%, the distribution is supported by cash flow, and the partnership has additional growth opportunities in natural gas infrastructure.

Levi Strauss offers the strongest traditional growth story. The company has an iconic global brand, improving margins, expanding direct sales, and a dividend that can grow alongside earnings.

All three demonstrate the value of looking beyond a single number.

The PEG ratio helps us compare valuation with earnings growth.

The dividend yield provides a current cash return.

Dividend growth tells us whether earnings and free cash flow may be expanding.

A conservative payout ratio creates room for future increases.

A strong balance sheet helps protect the dividend when the economy inevitably goes sideways.

The ideal company is not necessarily the fastest grower or the highest yielding stock. It is a financially strong business capable of compounding earnings, returning increasing amounts of cash to shareholders, and doing both at a valuation that does not require perfection.

The Bottom Line

Wall Street will continue dividing the investment universe into growth stocks and income stocks because Wall Street likes categories.

Categories make it easier to create products, charge fees, and produce colorful pie charts.

We do not need to play that game.

We can use the Benzinga Pro stock screener to search for companies that grow earnings, pay dividends, increase those dividends, and trade at reasonable prices relative to their growth rates.

The screen will not produce a winner every time.

Nothing will.

The objective is not perfection. The objective is to purchase profitable, growing businesses at sensible prices and give them enough time to compound.

A low PEG ratio gives us growth at a reasonable price.

A secure dividend gives us cash while we wait.

Dividend growth tells us that the business may be getting stronger.

Put all three together, and we have one of the most practical formulas I know for finding long-term winning stocks.