Three stocks that should provide a healthy income whatever the economic weather

Sam Morse of the Fidelity European Values Fund picks three stocks that should be able to grow their dividends whatever the economy is doing.

Each week, a professional investor tells us where he'd put his money. This week: Sam Morse of the Fidelity European Values Fund picks three stocks growing their dividends.

The approach I take to managing the Fidelity European Values Fund is to look beyond the economic and political noise and concentrate on the real-life progress of listed businesses across this large and diverse region. In running the fund, I focus on researching and investing in stocks I believe can grow their dividends consistently, irrespective of the prevailing economic backdrop. History shows that these companies tend to outperform the market over the longer term.

My investment process is, therefore, built from the bottom-up, looking at individual businesses, but keeping aneye on the wider market to avoid unexpected pitfalls. On this basis, I builda portfolio of attractively valued companies with strong balance sheets, a track record of cash generation and the potential to grow dividends sustainably on a three- to five-year view.

Two global leaders

To give you a good example of the type of company I look for, the fund holds a position in French cosmetics house L'Oral (Paris: OR), a world leader in the industry, with plenty of resilience to any potential downturn in the global economy. The company has managed to deliver consistent dividend growth over the years, close to a double-digit rate. L'Oral's growth has been driven by various factors, including a rising middle-class in emerging markets, an expansion of the ageing population, as well as the cultivation and strengthening of its brands and innovation. This provides L'Oral with further opportunities to expand its market share both organically and through bolt-on acquisitions.

Another example is the Swiss firm Roche (Zurich: ROG), a multinational biopharmaceutical company, with a long-term track record of growing dividends. Over the past couple of years, the healthcare sector has performed poorly owing to pricing pressures in the US and a weakening dollar relative to the euro. Nevertheless, I believe that Roche is at a very interesting juncture today, and its dividend growth will accelerate from here. The company has a number of "best in class" newly launched drugs that can drive growth and fend off "bio-similar" products from competitors.

A big player in a stabilising market

A final example is Kone (Helsinki: KNEBV), an international engineering and maintenance services company based in Finland that specialises in elevators. This is a good example of a business that has plenty of scope to be revitalised and grow its returns further. The company first established itself in China at a time when the market was growing rapidly and experiencing high levels of competition. In turn, this triggered a drop in the company's profits and margins. However, we believe that the Chinese market is beginning to stabilise, and this should work to Kone's advantage, as smaller players in the industry are more likely to feel the pressure of the rising cost of raw materials. As a result, Kone, which already pays a very attractive dividend yield of 3.7%, will see an acceleration of dividend growth and will be able to maintain its healthy balance sheet. The latter gives the firm plenty of scope for mergers and acquisitions, as well as further investment opportunities.

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