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By Shannon Zimmerman | 10-09-2012 11:00 AM

How Much More Can Dividends Grow?

Despite fears of a dividend bubble, companies with long-term dividend-growth potential of 7%-9% per year remain very attractively valued, according to ClearBridge's Michael Clarfeld.

Shannon Zimmerman: Let's just speak broadly about the market, right now. You're a stock investor and so, there's a kind of incentive that goes for all stock investors: The market always looks attractively valued if you're selective in terms of the stocks that you choose. What's your view though of the market broadly. Is it overvalued? Fairly valued? Is it hard to find opportunities now relative to a few years ago?

Michael Clarfeld: Yes, I think that's a good question. So, I think, you're right that there is an inherent tendency among investors or people to sort of fall in love with the things they follow, and so, equity investors may always find equities attractive. That's it, I think actually our track record would demonstrate some differences there. If you look back at, our track record probably with [ClearBridge manager Hersh Cohen] in the late 1990s, when equities were incredibly overvalued, Hersh was over 20% cash. So, when we see huge disconnects, we're not afraid to take significant stances like that.

Today, what we see in the marketplace is we believe you got to separate a little bit the short term and the long term. From a long-term perspective, we believe that equities are attractive these days. At about 14 times earnings, we think on a stand-alone basis that's a reasonable place to be at.

Zimmerman: Near the historical norm.

Clarfeld: Near the historical norm, that's right. And when you compare them with alternative assets--fixed income, real estate, or what have you--we think equities stand out as being very attractive. So, on a long-term basis, we're very constructive on equities. From a short-term perspective, we're also very cognizant of everything going on in the world, whether it's things in Europe, political issues in the United States, and what have you, those headlines will drive short-term volatility.

So, we try to be mindful of that a bit. But certainly, the bigger driver of our investing decisions is our long-term assessment. We try not to obsess too much about the short-term goals. And so our focus really today is on that longer-term view, where we believe that it's an attractive time to be putting money to work in the equities.

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