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Three stocks to buy for growth and yield

Focus on companies with plenty of cash and generous dividend yields, says professional stock picker Charles Lukes. Here, he tips three such stocks to buy now.

Each week, a professional investor tells MoneyWeek where he'd put his money now. This week:Charles Luke, senior investment manager, Aberdeen Asset Management.

Economies in mature markets have started the healing process and investor sentiment has been buoyed by the perceived lower risk of a collapse of the eurozone. However, high levels of consumer and government debt, stresses still lurking within the financial system, the future impact of austerity measures and challenges related to economic rebalancing remain significant barriers to enduring growth.

In these still-difficult circumstances, it is important to focus on companies that offer healthy organic growth, diversified revenues, robust balance sheets and leading competitive positions with strong pricing power. Numerous studies have also highlighted the importance of reinvested dividends in generating returns.

So companies with attractive dividend yields and the ability to grow them over the long term should also be a key focus. I'd expect the following three companies to generate attractive returns.

The first is Unilever (LSE: ULVR), a company I mentionedhere 18months ago. Although it has performed well since then, it is still attractive. The main draw is the company's significant exposure to faster-growing emerging markets, where it has built up extensive distribution networks. The brand portfolio remains strong and includes names such as Lynx, Dove, Knorr and Magnum.

A renewed focus on innovation should drive growth the company is aiming to double revenues over the next ten years to 2020 and in doing so should improve its margins through economies of scale. The company has a robust balance sheet, attractive cash flow and should deliver good earnings and dividend growth.

My second choice is Compass (LSE: CPG), a leading global contract-catering company benefiting from the long-term trend towards outsourcing. Only around half of this £200bn market is currently being tapped, with healthcare and education in particular offering big opportunities. The company has scope to gently increase operating margins via cost savings in areas such as labour scheduling and food procurement.

Compass is also steadily increasing its exposure to emerging markets (by expanding its operations in countries such as India and Brazil) while moving into support services, a market that is growing at around twice the pace of catering. The combination of likely high single-digit earnings growth, a dividend yield around 3% and an ongoing share buy-back programme (built on strong cash flow) offers an attractive total return.

My final choice is the Nordic bank, Svenska Handelsbanken (Stockholm: SHBA). The bank has a very strong capital position and benefits from some of the lowest funding costs in Europe. It has an appealing track record of value creation based on its conservative philosophy and focus on the long term (it avoided financial support from either the Swedish government or its shareholders during the financial crisis).

The bank's strategy differs from its peer group with a focus on high service levels, relatively wealthy customers, and decision-making at branch level. It also has only limited exposure to the investment banking operations that have proven to be so troublesome for its competitors.

Opportunities for growth include the British market where the bank has over 140 branches. The shares offer a dividend yield of just under 4% and have the potential to deliver attractive dividend growth.

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