Dividend-Growth Stocks Could Thrive This Year

Shares with above-average yields and rising dividends may well offer the best returns in 2012.

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The U.S. economy is showing some signs of improvement and many forecasters are hoping for a better stock market this year. But share prices would still suffer if there is a double-dip recession or if the U.S. is hit by external shocks – such as a collapse of the common euro currency.

Finding the best investments in such a climate is tricky. Some defensive choices, such as bonds, could be hurt if long-term interest rates rise – something that many economists think likely. On the other hand, growth stocks would suffer if there is any kind of economic slowdown.

The best compromise may be stocks with both above-average yields and solid growth prospects that allow dividends to be raised over time. That way, you have predictable income in any market and still enjoy the opportunity for bigger gains if the economy picks up further. Indeed, high-yield shares were superior performers in last year’s stagnant market, providing returns that were five percentage points higher than that of the average stock.

(MORE: The Big Winner of the Great Recession Is … )

There’s a broad range of such stocks to choose from. But here are 11 that are prominent in dividend-growth fund portfolios and pay yields higher than the 2% offered by the S&P 500. These 11 companies also have strong balance sheets and solid prospects for future growth, while their shares currently trade at reasonable price/earnings ratios.

The 11 stocks, listed in order of yield are: drug-giant Pfizer, with a 4% yield; Kleenex-maker Kimberly-Clark, 3.9%; health-care conglomerates Abbott Laboratories and Johnson & Johnson, both paying 3.5%; computer chipmaker Intel, 3.3%; snack and soft-drink giant Pepsico, 3.2%; soapmaker Procter & Gamble, 3.2%; oil giant Chevron, 3.1%; drugstore chain Walgreen, 2.8%; Scotch Tape maker 3M, 2.6%; and aerospace conglomerate United Technologies, 2.5%.