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Rolls-Royce (LSE: RR.) shares have been an absolute dream for growth hunters. The FTSE 100 aerospace engineer has soared 1,459% in just five years. That number almost beggars belief.
A £10,000 stake bought at the start of this stunning surge would now be worth £155,900. Those are lottery-style returns, the sort of transformation that gets people hooked on buying shares. The Rolls-Royce share price continues to demonstrate staying power, up 135% in the last year alone.
But it will struggle to maintain its trailblazing trajectory. This is now a £94bn company, which makes it far harder to repeat that meteoric growth.
Can it grow much further
Rolls-Royce will do its best. Latest half-year results on 11 August showed underlying revenues rising by double-digits, while operating profit jumped 50%. Full-year guidance has been lifted to £3.1bn to £3.2bn, up from £2.7bn to £2.9bn. This suggests Rolls-Royce could have further to go.
It also has new growth opportunities to explore in areas such as small-body aircraft engines and nuclear power projects, while defence spending looks set to remain high. These could provide steady, long-term demand. But none of this is guaranteed. Big government-led projects take years to land, and some never happen at all.
Broker sentiment remains positive. Out of 26 analysts covering the stock, 18 call it a Strong Buy, five say Hold and only one has it down as a Sell.
Dividends return, but slowly
Income hunters haven’t had much to celebrate. Rolls-Royce froze the dividend at 4.02p in 2017, cut it to 1.58p in 2019, then scrapped it for the next four years, after the pandemic. It returned in 2024, with a payout of 6p per share. That gives a trailing yield of just 0.45%. Nobody would buy this stock purely for the income.
Still, it’s moving in the right direction. Management is guiding for a 50% increase this year. This looks generous, but it will only lift the total shareholder payout to 9p. That’s a forecast yield of 0.68%. Compare that to housebuilder Taylor Wimpey, which offers a bumper forecast yield of 9.34%, the biggest on the FTSE 100.
How much to invest
So, how many shares would it take to generate a £1,000-a-year second income from Rolls-Royce? Today, that would require 11,110 shares. Which would cost £125,709. That compares to just £10,707, if buying Taylor Wimpey instead.
The reality is Rolls-Royce is still a growth story, not an income one. And it’s going to stay that way for some years. Unless the shares fall, of course. That would bump the yield up.
Today’s lofty price-to-earnings ratio of 55 underlines that point. If profits disappoint, the shares could be punished.
I’ll happily hold the shares I already own, but I’m not rushing to buy more at today’s valuation. If the dividend keeps growing year after year, that could soften the impact of slower share price growth. But it will take time. In my view, investors considering the stock should continue to focus exclusively on the growth. And that surely has to slow from here. Although, I also said that one year ago!
