Three stocks with long-term appeal

Look through the short-term noise and focus on what's important. Professional stock picker Ed Beal tips three stocks for patient investors.

Each week, a professional investor tells MoneyWeek where he'd put his money now.This week: Ed Beal, manager, Shires Income Investment Trust.

One advantage of having a long-term investment horizon is that it enables us to look through the noise that permeates markets and focus on what's really important for our businesses.

Where others are consumed by the concerns of the here and now, we try to step back and determine whether what's happening is fundamental to the long-term prospects of an investment or just short-term effects that move share prices. Very often, firms that are good quality will remain of that calibre, though they may have to work through tough times.

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A second advantage is the ability to think of the income generated by our holdings as a compounding return. We don't chase high or unsustainable income today, given the risks that it will be diminished in the future, either by deteriorating business prospects or inflation.

In many instances, we would prefer to accept a lower initial yield, but one that is accompanied by a reasonable expectation that the company can deliver above-inflation growth in the dividends it distributes over the long term. With these points in mind, here are three companies that have been looking attractive recently.

Croda (LSE: CRDA) is a speciality chemical firm that produces niche, naturally derived products that are sold to the personal care, life sciences and crop care markets. The high-value nature of these products means that Croda's profit margins are materially higher than those normally seen in the industry. Croda has a global infrastructure and deep relationships with its customers and its products are often at the heart of its clients' new product launches.

The return on capital employed is also attractive, boosted by the asset-light business model. This allows Croda to focus on attractive business opportunities rather than being forced to pursue volumes in order to make the best use of expensive infrastructure. Some temporary weakness in demand, at least partly related to foreign-exchange movements, recently gave us a chance to buy in. The five-year compound annual growth route (CAGR) in the dividend has been 25%.

Aveva (LSE: AVV) produces three-dimensional design software for large, complex infrastructure in the shipping, nuclear and energy markets. The business benefits from high recurring revenues, often with very long-term contracts, high technical barriers to entry, pricing power and a net cash balance sheet. Aveva is exposed to the oil and gas sector, and as such its share price has been hit by the decline in the oil price, creating a buying opportunity. The five-year CAGR in the dividend has been 22%.

Ultra Electronics (LSE: ULE) is an aerospace and defence business. This is an area of the market that has been out of favour with investors for some time, hence creating an opportunity. The company has particular strengths in the areas of cybersecurity and battleground IT. Both of these markets are expected to exhibit long-term structural growth, despite pressures in more conventional defence spending areas.

The company has a broad portfolio of products and end market exposures, which, allied with a strong balance sheet, has allowed it to be relatively resilient during a period of significant reductions in American and British defence expenditure.The compound annual growth in the dividend has been well in excess of inflation over the last five years.

Ed Beal is the manager at the Dunedin Smaller Companies Investment Trust. Ed has contributed to MoneyWeek in the past, giving his outlook on share tips.