RECENTLY a young couple consulted with me about investment options. They were interested in holding US dollar denominated assets and were keen on stocks but had a limited amount to invest. After determining their risk profile and considering their goals, I recommended some well-known stable dividend stocks with yields higher than the 10-year US Treasury Bond yield of two per cent to provide them with the cash flow that they desired and the potential to grow their portfolio.

In fact, my investment strategy for 2012 is a focus on stocks that have the potential for price appreciation but which also have particularly high-quality dividend yields. This is because dividends provide somewhat of a buffer to price fluctuations. Additionally, in choosing these stocks I looked for relatively attractive valuations (holding true to the tried and demonstrated "buy low, sell high" strategy), solid historical financial performance, strong fundamentals, and last but certainly not least, growth potential.

Just last week, The Coca-Cola Co announced an 8.5 per cent increase in its dividend payment to US$0.51, pushing its yield to 2.95 per cent. This was nothing foreign for the company, which has raised its quarterly dividend for 50 consecutive years. This consistent growth in dividend payments has also been in-line with Coca-Cola's stock price appreciation over the years. Of note, the stock which has advanced seven per cent year-over-year (yoy) to US$69.05 (close price on February 17, 2012) has appreciated 43.74 per cent over the past five years.

Owing also to its diverse business, the company has gone from strength to strength as illustrated in its solid historical performance. In addition to producing carbonated beverages, Coca-Cola's product line includes a range of beverages such as Dasani water and Minute Maid, as well as energy drinks and teas. The company reported Q04 2011 Earnings per Share (EPS) of US$0.79 which topped analysts' average estimates of US$0.77 as total sales rose 5.2 per cent to US$11 billion driven by increased sales of juices and teas in Asia.

It is therefore no surprise that renowned billionaire investor Warren Buffet has displayed his confidence in the global beverage giant. The mogul, who accumulated shares of the company between 1988 to the early 1990s, describes Coca-Cola as attractive given that it sells products in almost every country, boasts sizeable profit margins, and has the ability to charge a premium due to consumer reluctance to shift from its products.

Another company with a similar global reach is McDonalds Corp. Almost three times the size of its closest competitor, not many companies dominate their sector the way McDonald's does. Founded in 1940, the food-service retailer operates approximately 32,943 restaurants in 117 countries worldwide. Part of McDonald's success has been its customisation of menus, commitment to continuous improvement in its restaurant models and customer experience, coupled with its effective marketing. For example, in India, McDonald's does not offer traditional beef hamburgers (respecting the Hindu religion), but markets chicken burgers in addition to a successful vegetarian line with items such as the McVeggie burger.

For its most recent quarter, the fast food giant continued to post robust results, with a fourth-quarter profit of US$1.38 billion, or US$1.33 a share, up almost 11 per cent from year earlier. With double digit sales and earnings growth projections, McDonald's is ideal for income investors. The stock has a dividend yield of 2.8 per cent, which is 50 per cent less than its expected future earnings stream. Notably, McDonald's, which has gained 31 per cent yoy to US$99.99 (close price on February 17, 2012), has appreciated steadily over the years, with a five-year appreciation of 118.76 per cent.

Though the health care / pharmaceutical sector is often characterised by mature companies, some of which offer limited capital appreciation, stocks within this industry are perhaps the most famed for offering attractive dividends paying stocks. One well-known US multinational pharmaceutical company is Pfizer Inc. The world's largest pharmaceutical company has a dynamic management team that has shown commitment to delivering value to shareholders through announced spin-offs/divestitures and dividends/share buybacks. Pfizer is a cash rich company, which recently hiked its dividend by 10 per cent and announced a new US$10-billion share repurchase programme, has an attractive dividend yield of 4.15 per cent based on its current price of US$21.19 (close price on February 17, 2012).

While facing increasing competition from generic pharmaceutical companies the company has been making structural changes to curb costs and importantly, is actively exploring other growth areas and opportunities. Pfizer recently established a new joint venture with Chinese-based Zhejiang Hisun Pharmaceutical to develop, manufacture and commercialise off-patent pharmaceutical products in China and global markets.

Bristol Myers Squibb Co is engaged in the discovery, development, licensing, manufacturing, marketing, distribution and sale of pharmaceutical products on a global basis. The company's products are sold worldwide, primarily to wholesalers, retail pharmacies, hospitals, government entities and the medical profession. Bristol-Myers reported fourth-quarter earnings of US$852 million, up from US$483 million a year earlier on a seven per cent rise in sales to US$5.5 billion. The stock, which currently has an attractive dividend yield of 4.11 per cent, has appreciated 27.74 per cent yoy to US$33.12 (close price on February 17, 2012).

Looking at the container industry, a sector that is typically not on our everyday radar, there are a number of options with attractive dividend yields. Of note, given the worldwide shortage of containers which emerged during the global recession and as such the container business is booming. As such, unlike the pharmaceuticals named above, these stocks offer not only dividends but also the potential for notable capital gains.

Tal International Group pays a dividend of US$2.20 per share and has a very attractive yield of 5.9 per cent. This global container leasing, sales and chassis company has a fleet of 991,807 containers and chassis. For the fourth quarter Tal reported adjusted net income of US$1.02 per share compared to US$0.76 per share in the prior year and surpassing the consensus estimate for US$0.99 as it continued to make aggressive investments to grow its container fleet. The stock has appreciated four per cent yoy to US$37.22 (close price on February 17, 2012) but has seen a gain of 29.21 per cent since the start of 2012.

In a similar line of business, Textainer Group Holdings Limited is a holding company that purchases, owns, manages leases and disposes intermodal containers. The company has a total fleet of over 1.5-million containers, making it the world's largest lessor of intermodal containers. Textainer posted record net income attributable to common shareholders of US$54.9 million for the fourth quarter and US$189.6 million for the full year. The stock, which currently has an attractive dividend yield of 4.66 per cent has appreciated nine per cent since the start of the year to US$31.79 (close price on February 17, 2012).

Portfolio growth should not be limited solely to capital gains. While dividends are not guaranteed, fundamentally sound companies with a history of increasing payouts to shareholders are considered gems and should not be left out of your portfolio, especially if you seek to boost your cash flows and lower the risk of equity investing.

Nicole Ziadie is the Manager, Wealth Division at Stocks & Securities Ltd. You may contact her at nziadie@sslinvest.com.

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