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By Jeremy Glaser | 05-28-2009 04:08 PM

Seeking the Best Dividend Bets

Paul Alan Davis, manager of the Schwab Dividend Equity Fund, on how investors can diversify among attractive dividend plays among high-quality names.

Jeremy Glaser: Hi. I'm Jeremy Glaser with Morningstar. I'm here today with Paul Alan Davis of Schwab's Dividend Equity Fund. Hi, Paul. Thanks for joining me today.

Paul Alan Davis: Thank you for having me.

Glaser: A topic on a lot of people's mind has been dividends. We've seen a lot of high-profile companies like General Electric cut their dividends, stalwarts that people thought would be producing income forever. Can you talk to us a little bit about how at Schwab you use your process to try to find which dividends are going to be sustainable and where you want to put your money to work?

Davis: Yeah, a lot of people tend to think of dividends and start their search with dividends. What we do is we use our Schwab equity ratings model that looks at 3,200 domestic companies and looks at fundamentals, valuation, momentum, and risk, and comes up with an overall score on all those companies. What we're doing is we're looking for quality companies that will do well over long periods of time. So we're not looking for turnarounds. We're not looking for the big growth stories. We're looking for the best candidates in each sector. So if you're looking for dividends, a lot of people get portfolios that are very skewed towards financials, telecom, some of the staples. What we do instead is we put together a portfolio that has coverage in each of the sectors and each of the industry groups to make sure that we have the best stocks and the highest dividend payers in those categories.

In constructing a portfolio like that, we have a yield that exceeds the S&P 500 by between 50 and 100 basis points, and if you look at the long-term track record, we've been able to do a pretty good job of managing dividends in that space.

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