What’s better, a stock that appreciates 7% over the next year along with a 3% dividend yield, or one that appreciates 3% and yields 7%? 

Tax implications aside, there isn’t much difference. Both will give you a total return of about 10%. If anything, option two would be preferable, as it throws off income more quickly and would net a slightly higher return when factoring in dividend reinvestment. 

#-ad_banner-#But when it comes to popular valuation metrics, all the focus is on the growth side of the equation, while income is all but forgotten. So investors that rely on these yardsticks will be inclined to buy the stock that is poised to grow 7% and overlook the one that is poised to grow just 3%. 

That can lead to missed opportunities.

Earnings growth usually translates into a rising share price over time. And generally speaking (although there are certainly exceptions), companies that return most of their excess profit through dividends will have slower growth than companies that pump their profits back into the business. 

So let’s rewind back to the beginning on the two stocks above. Let’s suppose the first stock had projected earnings growth of 10%, while the second had just 5%. If both carry an average P/E multiple of 15, then they will have traded at Price-to-Earnings-to-Growth (PEG) ratios of 1.5 (15/10) and 3.0 (15/5), respectively. 

I think PEG is a fast, efficient way to see how much we’re paying for a stock per dollar of profit in relation to the earnings growth of the business. As a general rule of thumb, a ratio of 1.0 is typically considered the dividing line between undervalued and overvalued. In this case, the first stock was trading at half the price of the second — it would appear to have been the better buy. 

But is that really the case? Remember, they delivered the same return. 

Any single metric (even good ones) will show an incomplete picture. But there is an easy way to make this one more inclusive. All we have to do is incorporate both growth and income in the denominator (since both contribute to a stock’s total return).

Doing so gives us what is called the Price/Earnings to Growth and Yield (PEGY). This measure tells how much a stock is selling for in relation to both earnings growth and dividend yield. For a quick tutorial on the calculation, visit this link. 

As my former colleague Carla Pasternak used to say, PEG is a handy tool, but it shortchanges dividend-paying stocks. PEGY helps level the playing field. 

Let’s quickly look at a real world example using one of my High-Yield Investing portfolio holdings, Crown Castle (NYSE: CCI). 

The stock is trading near $85, or 18 times this year’s estimated earnings of $4.67. Divide that by the long-term projected earnings growth of 10.3%, and you get a PEG of 1.75. But that doesn’t give CCI any credit for its healthy 4.1% dividend yield. Add that to the mix, and the PEGY (18/10.3 + 4.1) drops to 1.25, a far more attractive valuation. 

With all this in mind, I went in search of below-the-radar stocks that may seem expensive at first glance, but are actually bargain-priced by PEGY standards. Each of the candidates in the table below is priced at a 20% or greater P/E discount relative to the underlying earnings and dividend yield of the business. 

As usual, I weeded out those with mediocre yields below 4.0%:

Action to Take: This is just a stock screen to identify potential candidates that meet certain criteria. The stocks in the table above haven’t been researched and are not actual portfolio recommendations. 

PEGY, while a useful quantitative measure, doesn’t account for dividend sustainability or other factors. But it can be a great tool to measure relative value between stocks with different yields. The stocks in the table above all appear to offer considerable value. 

I’ve been watching Regal Entertainment (NYSE: RGC) for a while now. It has made the cut on previous “Inside the Numbers” screens, and is a part-owner of National CineMedia (Nasdaq: NCMI). Despite the proliferation of high-definition televisions, a trip to the movies remains a popular and affordable entertainment option — and box office revenues tend to rise at a steady 4% to 5% pace most years. 

With several potential blockbusters on the release schedule including the sequel to Disney’s Finding Nemo, 2016 looks to be another busy year. And Regal is the industry’s No. 1 player, with 7,361 screens nationwide. Those theaters will welcome 216 million visitors this year — who feed a generous dividend of $0.88 per share, for a 4.2% yield. 

Should a market pullback push that payout closer to 5%, I might be a buyer.

P.S. If you’re looking for a good source of high-yield stocks — you need to see this. You’ll find stocks paying up to 15.1%… high-yielding REITs, trusts, partnerships and ETFs. (These cash cows are also posting capital gains as high as +368% for us. I explain that part here.)