Three attractive dividend-paying stocks

By Alan Porter Jan 04, 2013

Alan Porter

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

I focus on high-yielding companies from around the world that offer growing and sustainable dividends. You could be forgiven for thinking that to own a portfolio entirely made up of such stocks you would have to sacrifice some return. But this is not the case.

Take my benchmark – the MSCI World High Dividend Yield index. Over its 17-year history, it has delivered better total returns than either the MSCI World or the FTSE 100 indices. And it has done so with lower volatility.

Another popular misconception is that the cyclical end of the market is something of a no-go area for equity-income investors. I categorise companies by their expected dividend per share (DPS) growth over the next three years.

Cyclicals (where dividends can be variable) are one of the four key groups that emerge. The other three are fast growth (greater than 7% DPS growth per year), medium (3%-7% DPS growth), and slow (less than 3% DPS growth) and each is represented in my portfolios.

Cyclical stocks demand particular care and attention. They carry with them their own set of risks – buying too early or too late in the cycle, for example, or holding them too long. But given proper scrutiny, there is no reason why they can’t form part of a balanced equity-income portfolio. Indeed, I have increased my cyclical exposure in recent months. Here are three shares I currently recommend.

One stock I have been buying lately is global paper and packaging company International Paper (NYSE: IP). Industry consolidation is a reassuring sign, and a trend that is very much in evidence here. In 1995, IP had a 7% share of the North American market for containerboard (used in corrugated boxes), while the top five players had a share of around 43%.

Today, however, IP is the largest North American producer, with a market share of about 34%, while the top four firms now control roughly 70% of the market. We expect the synergies and pricing power from such a transformation to come through in strong free cash flow (see below) and returns above the cost of capital.

IP recently raised its quarterly dividend by 14%, implying a yield of over 3.6%; we expect this to grow strongly over the next few years.

I also like companies with well-managed, high-quality assets. Global miner BHP Billiton’s (LSE: BLT) diversified portfolio has generated impressive cash flows throughout the economic cycle. Over the last ten years, it has pursued a progressive dividend policy and returned $53.8bn to shareholders through dividends and buybacks. This year it raised its full-year dividend by 11%, and we expect the robust growth to continue.

BHP Billiton

My third pick is Safran (PA: SAF), a French company that you may not have heard of. If you’ve taken a short-haul flight in recent years, chances are it’s played a key role in getting you to your destination.

In a joint venture with General Electric, Safran has a 75% market share of the market for engines for single-aisle commercial jets built by Boeing, Airbus, and Comac in China. These include the best-selling Boeing 737 and Airbus A320.

While airlines delayed their maintenance spending in the wake of the global financial crisis, Safran is now benefiting from a powerful recovery in the engine-servicing business.

In addition, it is enjoying strong secular growth from increasing flights to, and within, emerging markets and also in developed markets, where there is greater demand for fuel efficiency. Despite being an undisputedly cyclical company, Safran has managed to maintain a strong balance sheet and pay dividends every year for the last ten.

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