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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 2.8%.

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 will generally 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 28 names that made the list (see below) we have chosen to highlight Baxter International (BAX) and McDonald’s Corporation (MCD - Free McDonald's Stock Report).

Baxter International

Baxter International operates as a diversified healthcare company. Through its subsidiaries, it develops, manufactures, and markets products that save and sustain the lives of people with hemophilia, immune disorders, infectious diseases, kidney disease, trauma, and other chronic and acute medical conditions. As of December, 2012 the company manufactured products in 27 countries and sold them in more than 100 countries. Primary business segments include BioScience, which generated about 44% of last year’s total sales, and Medical Products (56%).

The company recently completed the biggest acquisition in its history when it bought Gambro, a Swedish medical equipment maker, for around $3.7 billion (financed with cash and new debt). The move greatly enhances Baxter’s kidney division, which had been seen as a bit undersized relative to some of the other businesses. Excluding one-time items, we estimate the purchase will trim earnings per share between $0.10 and $0.15 in 2013, and be neutral or accretive to the bottom line in 2014.

The drug-development pipeline looks solid. Indeed, over the past several quarters, the company has enjoyed healthy demand for its hemophilia treatments (Feiba and Advate), vaccines, and specialty plasma treatments. Notably, Baxter continues to devote a meaningful amount of resources toward research and development, and expects to release more promising candidates going forward, particularly in regard to hemophilia, cancer, and Alzheimer’s disease. Recent launches include RIXUBIS in the United States and HyQvia in Germany. 

McDonald’s Corporation

McDonald’s Corporation, a leader in the fast-food industry, operated, franchised, or licensed 34,734 restaurants in the United States, Canada, and other parts of the globe, under the McDonald’s banner as of June, 2013. Around 80% of the restaurants are operated by franchisees or affiliates, with the remainder under the control of the company. Foreign operations contributed 68% of systemwide sales and 56% of consolidated operating income in 2012. 

A number of factors are working against the company this year. For a start, customers in the United States remain cautious with their spending, in view of less-than-optimal economic conditions. Also, economies in Asia have slowed down and Europe continues to gradually recover from the sovereign debt crisis. To further complicate matters, there is stepped-up competition from the likes of Burger King (BKW) and Yum! Brands’ (YUM) Taco Bell, minimal pricing power, plus a mix shift to less profitable menu items. Consequently, management will probably be more judicious when it comes to opening new locations and raising prices.

On the positive side, McDonald’s seems to be picking up market share, thanks partly to a strong brand name and impressive global infrastructure. What’s more, comparisons ease as the year progresses, which should benefit same-store sales. All things considered, we believe that 2013 share net will advance to $5.60, relative to last year’s tally of $5.36. Additional expansion of operating margins ought to enable the company’s bottom line to reach $6.15 a share next year.

 

Company

Ticker

Bank of Nova Scotia

BNS.TO

Baxter Int'l Inc.

BAX

Brit. Amer Tobac. ADR

BTI

CA, Inc.

CA

Chevron Corp.

CVX

Clorox Co.

CLX

Coca-Cola

KO

Gen'l Mills

GIS

Intel Corp.

INTC

Johnson & Johnson

JNJ

Lockheed Martin

LMT

Mattel, Inc.

MAT

McDonald's Corp.

MCD

Microsoft Corp.

MSFT

Nat'l Bank of Canada

NA.TO

NextEra Energy

NEE

Northeast Utilities

NU

Occidental Petroleum

OXY

Paychex, Inc.

PAYX

Procter & Gamble

PG

Royal Bank of Canada

RY.TO

Sempra Energy

SRE

South Jersey Inds.

SJI

Sysco Corp.

SYY

TELUS Corporation

T.TO

Teva Pharmac. ADR

TEVA

Texas Instruments

TXN

Toronto-Dominion

TD.TO

Vodafone Group ADR

VOD

Wisconsin Energy

WEC

 

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