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Three solid dividend stocks

With current market conditions as volatile and uncertain as they are, professional investor Jeremy Whitley focuses on companies that can weather the tough economic times. Here, he picks three stocks which may not be considered classic 'dividend' stocks, but which should give good and growing pay-outs over the longer term.

Each week, a professional investor tells MoneyWeek where he'd put his money now. This week: Jeremy Whitley, head of UK and European equities at Aberdeen Asset Management, and manager of the Dunedin Income Growth Investment Trust.

While current market conditions are volatile and uncertain we're focusing on companies that can weather tough economic times. The three firms below would not be considered classic 'dividend' stocks, but they fit in well with our criteria of selecting firms with the ability to grow their pay-outs at good rates over the longer term.

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So how to find good-quality companies at attractive valuations? By good quality, we mean businesses with strong competitive positions, attractive prospects for growth, robust balance sheets, and excellent management. The ability to generate a sustainable and growing dividend is also a critical consideration. Several years ago, we broadened our investment horizon to include international companies. Specifically, we looked for those firms that offered exposures we couldn't find in the British market, superior return potential, or companies that would contribute to a more diversified portfolio.

The first of these is Linde (GR: LIN), the German industrial gases group. It is a business that meets all three of our requirements. It operates in a consolidated global industry with high barriers to entry, good levels of return, and extensive exposure to emerging market industrial growth. It also possesses a robust balance sheet and conservative, long-term focused management. We believe the valuation on thirteen times 2012 earnings is not unreasonable, given the quality. While the yield is not high at 1.9%, we expect it to grow at close to double digits over the coming years.

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Moving back to Britain, we like Rolls-Royce (LSE: RR), a leader in the manufacturing and servicing of engine turbines. These are used not only in commercial and military aviation, but also in applications from maritime vessels to nuclear power stations. Rolls-Royce has expanded from its very strong position in aviation engines into higher-margin servicing, as well as supplying turbines to other industries. It now has an order book of £58.4bn that equates to sales over five years.

We expect margins to continue to expand as services grow and revenues to develop as demand for the group's products increases, driven by the growth in global air travel from Asia and the Middle East. Rolls-Royce also has a strong management team and a net cash balance sheet. Given these characteristics, the valuation is attractive on twelve times 2012 earnings and we believe that once again the business can grow its cash returns to shareholders at a decent pace over the medium term.

GKN (LSE: GKN) is something of a contrarian choice. It has had its difficulties over recent years, but we believe it's at an important inflexion point in its development. The core Automotive Driveline business is stronger and more profitable than it has been in the past.

We see scope for significant internal restructuring and reshaping of their Powder Metallurgy and Land Systems divisions too. Their Aerospace operation is well placed to grow over the coming years as its positions on a significant number of defence and commercial programmes move into full production.

GKN has a highly capable and experienced management team, a strengthened balance sheet, and trades on a very modest rating of 7.8 times 2012 earnings. It has plenty of scope to deliver a growing dividend to investors.

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