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In this screen, we turned our attention to comparatively low-risk stocks that have good records for dividend growth. In addition, our selection criteria focused on those issues that our analysts project will continue providing investors with dividends that are likely to increase at above-average rates.

We began our search with stocks whose dividends have advanced at a compounded annual rate of at least 6% over the last five years. Similarly, we next narrowed the list to equities with projected annual dividend growth rates of at least 6% over the next three to five years. We also set a minimum estimated yield for the year ahead of 2.9%.

We then restricted our search to stocks with above-average ranks for both Safety (1 or 2) and Financial Strength (B++ or better), two of Value Line’s many proprietary ranks. Companies whose shares earn high marks for these metrics generally will fare better in volatile markets than the typical stock under our review. Lastly, to reduce the risk of underperformance, we limited the selection to issues ranked 3 (Average), or better, for Timeliness (i.e., relative price performance over the next six to 12 months), another proprietary Value Line measure.

The set of stocks that made the final cut are not only judged to be safer than most, but also possess proven and prospective dividend growth rates that are likely to exceed the average rate of inflation under the time periods chosen for this review. Consequently, the list will likely appeal to conservative investors in search of current income. We note that this group is comprised of a fairly wide range of companies, not just regulated utilities and financial institutions as per past dividend-focused screens. Not surprisingly, our list is dominated by large-cap industry leaders. Of the 14 names that made the list (see below) we have chosen to highlight, Johnson & Johnson (JNJ - Free JNJ Stock Report).

Johnson & Johnson

Johnson & Johnson manufactures and sells various health care products. Its major business lines consist of numerous household goods. The company operates in a variety of segments, including Consumer (baby care, nonprescription drugs, sanitary protection, and skin care), Medical Device & Diagnostics (wound closures, minimally invasive surgical instruments, diagnostics, orthopedics, and eye-care), and Pharmaceutical (contraceptives, psychiatric, anti-infective, and dermatological drugs).

JNJ is coming off a solid fourth quarter when the top line increased 8%. There was some sluggishness in the Consumer division as softness in the U.S. was mostly offset by gains overseas. The Pharmaceutical group fared much better growing 7% thanks to notable drugs such as REMICADE, VELCADE, and PREZISTA. The Medical Devices & Diagnostics business has been the clear standout of late, thanks to the June 2012 acquisition of Synthes, the world's largest maker of implants to mend bone fractures, and a leading producer of surgical power tools and advanced biomaterials.

Johnson and Johnson was recently in the news after the FDA approved Invokana, a tablet used to improve glycemic control in adults with type 2 diabetes. According to the FDA, Type 2 diabetes is the most common form of the disease, affecting about 24 million people and accounting for more than 90 percent of diabetes cases diagnosed in the United States. Type 2 diabetes can cause heart disease, blindness, and nerve and kidney damage. Invokana is the first in a new class of drugs known as SGLT2 inhibitors. Instead of other treatments that increase the supply of insulin, Invokana works by blocking the reabsorption of blood sugar (glucose) by the kidney, increasing excretion in urine, and lowering blood glucose levels. Over the next several years, the drug may well become a meaningful contributor to Johnson & Johnson’s bottom line, and in general, we are pleased with the number and potential of drugs in the pipeline.

Management appears optimistic about the company’s future as well, owing to recent acquisitions, investments, and pipeline developments. It is currently calling for a 5%-7% earnings advance in 2013. This should ensure that the company continues to grow its dividend. Currently JNJ’s quarterly distribution is yielding just under 3% on an annual basis. Overall, we think these shares are a good choice for conservative investors who may be concerned by the fact that the broader market averages are trading near their all time highs.

 

Company

Ticker

Dividend Yield

Clorox Co.

CLX

3.06

Johnson & Johnson

JNJ

2.99

Procter & Gamble

PG

2.92

Royal Bank of Canada

RY.TO

4.12

Unilever PLC ADR

UL

3.05

Analog Devices

ADI

2.93

Applied Materials

AMAT

2.97

Chevron Corp.

CVX

3.03

Dominion Resources

D

3.87

Gen'l Mills

GIS

2.98

Harris Corp.

HRS

3.39

Hasbro, Inc.

HAS

3.64

Lockheed Martin

LMT

4.87

Mattel, Inc.

MAT

3.29

Microsoft Corp.

MSFT

3.22

Nat'l Bank of Canada

NA.TO

4.57

NextEra Energy

NEE

3.4

Northeast Utilities

NU

3.38

Sempra Energy

SRE

3.15

South Jersey Inds.

SJI

3.27

TELUS Corporation

T.TO

3.82

Texas Instruments

TXN

3.16

Toronto-Dominion

TD.TO

3.83

United Parcel Serv.

UPS

2.89

At the time of this article's writing, the author did not have positions in any of the companies mentioned.