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In this screen, we turned our attention to low-risk stocks that have good records for dividend growth. In addition, our selection criteria focused on those issues that our analysts project to 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 7% over the last five years. Similarly, we next narrowed the list to equities with projected annual dividend growth rates of at least 5% over the next three to five years. We also set a minimum estimated yield for the year ahead of 3.1%, which is 100 basis points (100 basis points equals one percentage point) higher than the current median for all dividend-paying stocks under our review.

We then restricted our search to stocks with above-average ranks for both Safety and Financial Strength, two of Value Line’s proprietary measures. 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 relative price performance over the next six to 12 months.

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 have and are likely to advance at a rate exceeding 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 many past dividend-focused screens. Indeed, other industries, such as healthcare, had a strong showing. Not surprisingly, however, is the fact that our list is dominated by large-cap industry leaders, several of which are Dow 30 components. Here are some highlights. 

Johnson & Johnson (JNJ - Free Analyst Report) manufactures and sells healthcare products. The company’s major product lines include Consumer (baby care, non-prescription drugs, sanitary protection, and skin care), Medical Devices and Diagnostics (wound closures, minimally invasive surgical instruments, orthopedics, and contact lenses) and Pharmaceuticals (contraceptives, psychiatric, anti-infective, and dermatological drugs).

Johnson & Johnson’s earnings per share may increase only slightly this year, owing to recalls of TYLENOL and several other over-the-counter medicines and the related suspension of manufacturing at a large plant in Pennsylvania, which is likely to trim profits by $0.10 to $0.15 a share. Accelerating pricing pressure at the European pharmaceuticals business is another area of concern. However, cost savings from a recently completed restructuring program have helped to offset some of these issues. On a brighter note, we look for a 7% to 10% earnings advance next year, thanks to likely contributions from recently launched pharmaceuticals. These include biologics to treat psoriasis, arthritis, and schizophrenia in adults. For the long run, we look for Johnson & Johnson’s earnings to reach $6.70 a share in the 2013-2015 time frame. A strong drug-development pipeline, coupled with expansion plans in Brazil, China, and India are the backbone of our optimism. This should result in a near-double-digit annual improvement in the dividend over the 3 to 5 years ahead.

Procter & Gamble (PG - Free Analyst Report) makes detergents, soaps, toiletries, foods, paper, and industrial products. The company’s major brands include Always, Head & Shoulders, Olay, Pantene, Well, Downy, Tide, and Pampers. Domestic revenues accounted for nearly 40% of the total in fiscal 2010. Wal-Mart Stores (WMT – Free Analyst Report) constituted 16% of fiscal 2010 revenues. Beauty & Grooming accounted for 34% of last fiscal year’s sales; Health & Well Being, 36%; Household Care, 30%.

Procter & Gamble should regain sales momentum in fiscal 2011, which began on July 1st. The company continues to step up its efforts to bolster global market share and revive volumes. The uncertain economic climate does present some challenges in the near term, however. Hence, P&G’s strong and innovative product pipeline will likely prove a critical revenue catalyst. What’s more, pricing should begin to turn positive in the latter half of 2011, while earlier productivity enhancements and expense reductions ought to help ease any margin pressure stemming from rising commodity costs. We look for high single-digit annual revenue growth for the pull to 2013-2015, thanks to healthy new product development, an improved cost structure, and geographic expansion in lucrative countries such as India. Hence, we look for the stock’s dividend to climb to $2.18 (from its current $1.93), by 2013-2015, which would imply an annual yield of 2.3% based on our expected Target Price Range of 85-105. We believe that healthy cash flow from operations will handily cover dividend increases over the next 3 to 5 years. The company’s Financial Strength rating of A++ gives us confidence in our assumptions. We see little risk to our dividend projections out to 2013-2015, given the company’s immense size and strong foothold in the Household Products industry.

Waste Management (WM) is the largest solid-waste disposal company in North America. The company and USA Waste Services merged in July of 1998. The company operates about 270 landfills, 600 collection operations, and 345 transfer stations in North America. Revenue mix in 2009 consisted of collection (68%), land fills (22%), and waste-to-energy, recycling, and transfer stations (10%).

We look for Waste Management’s operating margin to slip this year. In the first half of 2010, price hikes at the municipal waste-collection business were below the norm of recent years. Also, a 30% year-to-year increase in the price of diesel fuel will likely curtail margin improvement. The probability of increased income at the recycling and waste-to-energy unit accounts for much of the modest earnings improvement we expect to see this year. We look for earnings growth of about 10% per annum over the 3-to 5-year pull. WM’s industrial and construction-related waste streams have dropped sharply since mid-2008, and we believe they will begin to improve next year. Also, profit contributions from environmental initiatives should increase markedly in the coming years. Hence, we look for annual dividend growth of 6%-8% out to 2013-2015 based on healthy cash flow from operations. The company has plans to expand waste-to-energy plants in Europe (six new plants) and four in the United States by the end of 2012. The increased capital expenditures resulting from these endeavors may alter our long-term dividend-growth projections, though we view this as unlikely at this point.

To see the full results of our screen, complete with Timeliness, Safety, and Financial Strength ratings, subscribers can click here. As usual, we advise investors to carefully review both full-page and supplementary analyses in our Ratings & Reports before making commitments to any of the equities on the list of stocks produced by our screen.

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