Shake these 'money tree' income stocks

Professional investor Alan Porter tips three good-value income stocks to add to your portfolio.

Each week, a professional investor tells MoneyWeek where he'd put his money now.This week: Alan Porter, portfolio manager, Securities Trustof Scotland.

The major themes that preoccupied markets towards the end of 2014 falling oil prices, the threat of global deflation, and the fragility of the eurozone have carried on into 2015. We keep a close eye out for opportunities or threats arising from these sorts of events. But our main focus is on what's important for our investors to deliver an attractive, growing dividend income with the potential for capital gains.

To achieve this, I look for high-yielding firms around the world that offer sustainable dividends. I look for two margins of safety when investing. The first is about income: does the company have more than enough means to pay an attractive and growing dividend? Secondly, I look at valuation we don't want to overpay for these companies. Here are three that currently fit the bill.

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

Meggitt (LSE: MGGT) is a British engineering firm specialising in aerospace equipment. I expect organic sales growth to pick up strongly because it enjoys good pricing power, attractive margins and high barriers to entry.

Growth is likely to be driven by an improving civil aerospace market, while a recovering aftermarket (providing follow-up services after the initial sale) should also benefit from a lower oil price. The dividend is well covered by cash flow, even assuming only modest growth.And it announced a share buyback in November, underlining its strong financial position. The shares remain good value.

Our second stock is an American wireless-infrastructure firm, Crown Castle (NYSE: CCI). As consumers download ever more content on their mobile devices, so mobile data usage should continue to rise, driving more demand for Crown Castle's products. This growth should also be profitable: given the fixed costs associated with building and installing towers, it should benefit from rising incremental profit margins (as ever more customers use this infrastructure).

What's more, price rises incorporated into its customers' contracts should boost its profitability. The sustainability of Crown Castle's business model gave management the confidence to change its structure and set up as a real-estate investment trust (Reit) in January 2014. This means it pays out most of the cash it generates. On a valuation basis, the stock is attractively valued relative to the Reit sector.

Givaudan (Switzerland: GIVN) is a Swiss flavour and fragrance maker. The company is growing, thanks to the flourishing health and wellness market. It is also expanding into developing markets. We believe it can boost its sales by around 5% a year; this, combined with some operating leverage, provides attractive profit and cash-flow growth.

Givaudan has a strong financial position and as a result I expect management to increase the dividend payout significantly. Even accounting for the dividend growth we anticipate, it still enjoys a decent margin of safety in terms of cash flow relative to the dividend. The shares also offer value on a cash-flow basis.

Overall, despite obvious concerns about the sorts of events I highlighted at the start of this piece, I believe equity markets will remain supported by the fact that stocks still look attractive on a yield basis, particularly when you compare them to bonds and cash. Meanwhile, companies' balance sheets give us confidence that dividends are sustainable.

Alan Porter is fund manager of the Securities Trust of Scotland.