Three stocks with strong dividend streams

Professional stock picker Charles Luke tips three stocks to buy now, with robust balance sheets and the ability to grow earnings.

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

Murray Income Trust's (LSE: MUT) objective is three-pronged: to generate a high income, a growing income, and capital growth. The best way to do this is to concentrate on companies with strong market positions and robust balance sheets that have the potential to grow their earnings (and hence their dividends) over the long term.

Perhaps surprisingly, over the last 18 months earnings growth for the UK market in aggregate has, so far at least, failed to show signs of improvement. The returns we have seen as the market has moved ahead have been due to a rerating (where investors are willing to pay more for a given level of earnings).

Of course, markets can't perform well forever without earnings making progress, so it's important to focus on companies that have the potential to deliver strong earnings growth over a long timeframe. I believe the three below fit the bill.

The first is Compass (LSE: CPG), a leading global contract-catering company benefiting from the long-term trend for companies to outsource more of their non-core functions.

Around half of its £200bn market is outsourced, with healthcare and education particularly underpenetrated. The company also has scope to gently increase operating margins via cost savings in areas such as labour scheduling and food procurement.

Compass is steadily increasing its exposure to emerging markets (by expanding operations in countries such as India and Brazil), while also offering various support services, a market that is growing at around twice the pace of catering.

The combination of likely high single-digit earnings growth, a prospective dividend yield close to 3%, and an on-going share buy-back (given its strong cash flow characteristics) provides an attractive total return.

My second choice is Cobham (LSE: COB), a company that has endured a more difficult period over the past couple of years as US defence spending has been reined in. Indeed, trading is likely to remain difficult in the short term as contract awards are delayed.

However, the company has leading market positions in a number of areas such as air-to-air refuelling and antennae that provide the opportunity to expand into new geographical markets. Cobham is also making good progress with its efficiency measures.

Through this more challenging period the company has been retuning its operations to focus on its civil aerospace business where growth remains robust.

The company has a target to grow its dividend (from a current yield of 3.5%) by 10% a year. It also offers a strong balance sheet that gives it the option to acquire rivals, buy back shares, or perhaps announce a special dividend, and it trades on an attractive valuation of 12.5 times 2013 earnings.

The final company is Inmarsat (LSE: ISAT), the market leader in satellite communications. The company benefits from significant barriers to entry, including the requirement for spectrum rights, orbital slots and sizeable capital requirements.

Within the next 18 months Inmarsat will be launching its next-generation service (known as Global Xpress), offering significantly enhanced data speeds and capacity.Further growth will come from the company's focus on its core area of operations, with machine-to-machine and in-flight connectivity potentially significant markets.

The shares offer a dividend yield of more than 4% and, while not cheap on 22 times December 2013 earnings, they offer the prospect of delivering long-term earnings and dividend growth from a unique competitive standpoint.

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