Three stocks with healthy dividends
It's going to be a few years yet before the world returns to a healthy level of economic growth, says professional investor Hugh Yarrow. Here, he tips three quality, dividend-paying stocks to buy now.
Each week, a professional investor tells MoneyWeek where he'd put his money now. This week: Hugh Yarrow, manager of the Evenlode Income Fund.
At the heart of recent stockmarket weakness is a creeping realisation that the global economy is not recovering as strongly as hoped from the banking crisis and subsequent recession of 2008-2009. Unemployment in Britain and America remains close to crisis highs. Quantitative easing has not had as positive an effect as central bankers hoped it might. Meanwhile, the eurozone crisis lurches from one insufficient policy measure to another.
The new era we are in the Great Deleverage' is characterised by consumers and governments paying down their debts and restoring their financial health. Although we are three to four years into this process, history suggests that at least the same amount of time may need to pass before the world can return to a more sustainable, healthy level of economic growth.
Some businesses are better placed to weather this challenging climate than others. In particular, businesses with high customer loyalty, repeat-purchase products, geographic diversity and strong cash flow should do well. Some of the highest quality UK-listed businesses not only possess these qualities, but are also attractively priced and pay healthy, growing dividends. Here are three we like.
Unilever (LSE: ULVR) is the second-largest branded consumer goods business in the world, established in 1930 and with roots dating back more than 150 years. Its large and diversified brand portfolio includes Lipton Tea, Hellmann's mayonnaise and Dove soap. These are low-cost, essential items that tend to be bought no matter how bad things get.
Three quarters of Unilever's brands are number one or two in their market. The company's emerging markets presence is second to none, with more than 50% of sales coming from these regions. The upward income mobility of emerging-market consumers provides Unilever with a long runway of growth over coming years. The stock currently yields 4% and recently increased its dividend by 7%.
Smith & Nephew (LSE: SN) is a healthcare firm with products ranging from replacement hips to surgical dressings. Due to concerns over pressure on healthcare budgets, its share price has struggled recently. But as management puts it, "an economic recession doesn't cure osteoarthritis".
The developed world's population is growing older and demand for healthcare is increasing. In emerging markets, spending on healthcare is growing rapidly. It's also a potential takeover target. The medical devices sector is consolidating and recent takeover multiples in the sector suggest it could be worth at least £10 to a private buyer. This compares to a current share price of £5.79.
Sage (LSE: SGE) is the global market leader in business management software for small- and medium-sized enterprises. It boasts six million customers worldwide. If you ask the financial controller of a small business what accountancy software they use, the chances are it will be Sage.
Two-thirds of Sage's sales come from annual subscriptions and renewal rates run at more than 80% (once business-critical software is embedded in your business, you are unlikely to want to switch supplier). The outlook for spending on Sage's products remains well supported, as businesses use technology to improve efficiency in a tough economic environment. Sage's dividend is growing at 5% and the shares yield 3.2%.