Three cheap income stocks

With the financial markets so volatile at the moment, it is important to find stocks that offer sound dividends with the potential to grow, says professional investor Charles Luke. Here, he picks three robust stocks to buy now.

Each week, a professional investor tells MoneyWeek where he'd put his money now. This week: Charles Luke, manager of Murray Incomer Trust PLC.

European sovereign debt risk, a faltering US economy, policy tightening in emerging markets and the apathy of politicians in dealing with many of these issues all suggest we face an environment of lower growth and restricted access to credit for the foreseeable future. So it is important to focus on companies that offer strong organic growth prospects, internationally diversified revenues, robust balance sheets and leading competitive positions that provide healthy pricing power. They must also, of course, be attractively valued. Since numerous studies have highlighted the significance of reinvested dividends in generating total returns, companies with attractive dividend yields and the ability to grow dividends should also be a key focus. Here are three that meet my criteria.

The first is GlaxoSmithKline (LSE: GSK), one of the world's leading pharmaceutical companies. Over the past decade, the pharmaceutical sector has been de-rated due to concerns over the paucity of new drug approvals, poor research and development, government healthcare budget pressures and competition from generic substitutes. However, these issues are in the price. And with a yield now above 5%, the market is overlooking Glaxo's strengths. These include an attractive consumer healthcare business (home to brands such as Sensodyne and Lucozade) and a growing vaccine business that is less susceptible to generic competition.

In addition, there is scope for further cost savings and efficiencies, a factor highlighted by the company at its recent interim results. GlaxoSmithKline has also restructured its research and development. The beneficial results of this transformation are likely to become evident over the next 18 months as the company's final-stage development pipeline matures. Overarching all of this is the long term potential for growth in emerging markets, where increased wealth will provide new demand for the company's products.

My second tip is Pearson (LSE: PSON), a global leader in education. There are two main pillars of Pearson's strategy. Firstly, to develop and enhance digital services, which make the company's products more effective for students and teachers, as well as delivering higher profit margins. Digital products require significant levels of investment and provide a high barrier to entry. The second pillar is to expand in faster-growing, emerging markets such as China, India and Brazil (some reports suggest that up to one fifth of the Chinese population is learning English). Rapid investment (generated organically and through acquisition) is addressing these two strategic goals. Yet despite an enviable track record of both earnings and dividend growth, the company still has a relatively lowly valuation given the company's ability to generate long-term returns.

My final choice is consumer goods company Unilever (LSE: ULVR). It benefits from a strong portfolio of well-known brands (such as Hellman's, Dove, Lynx and Knorr). The firm also has an attractive geographic spread with significant exposure to faster-growing developing markets, and is concentrating on innovation to drive volume growth. It can improve margins (currently below its competitor group) through an improved focus on costs. The company has a robust balance sheet, attractive cash flow and should deliver appealing earnings and dividend growth.

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