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By Sonya Morris, CFA | 06-24-2010 12:55 PM

The Dividend Story Is a Good One

Investors can own really great companies today with terrific balance sheets, high returns on equity, and sustainable rates of rising dividends, says Legg Mason Clearbridge's Hersh Cohen.

Sonya Morris: Hello. I'm Sonya Morris, editorial director with Morningstar's mutual fund analyst team, and I'm here reporting from Morningstar's Investment Conference. And I'm joined today by Hersh Cohen, CIO of ClearBridge Advisors and manager of ClearBridge Legg Mason Dividend Strategies.

Harry "Hersh" Cohen: Lot of names to remember.

Morris: There are a lot of names to remember.

Cohen: Especially when you've changed names as often as I have.

Morris: Well, I think the key word to focus on is dividends.

Cohen: Dividends.

Morris: You're obviously a dedicated dividend hound. I wanted to explore that idea with you a little bit further.

People seem to be clamoring for income wherever they can get it. They are going to REITs and closed-end funds. One area they seem to be ignoring are dividend-paying stocks. Can you talk a little bit about why you think that's a good strategy for income-hungry investors to explore?

Cohen: Sonya, I scratch my head as to why people are ignoring them, although when I dig a little deeper, I believe it's because people are nervous about stocks and they think stocks are this risky asset category, which they can be, obviously, and we've had two big bear markets over the last decade.

But even if you look at the last decade, where stocks went down 2% a year compounded, dividends went up almost 6% a year compounded. And so, what I try to tell people is that dividends have returned 40% of the overall market returns over the last 100 years, call it, and there's a reason for that. Companies reward shareholders' share of the profits with their shareholders.

And what you have now because stocks have had these bear markets and because stocks are neglected, what you have now are these really first-rate companies, most of which people would instantly recognize and feel comfortable about it, if they actually thought about it, because they use the products and they see the products being used, the products tend to get used up. And so, there's a constant demand. It's not like the business is going to fall off a cliff in the next quarter.

And the upfront returns available on these companies now range from being low 2% up to 5% and 6% in some cases. And when you compare that to the risk-free rate of return, call it a 10-year treasury, call it a five-year treasury, I just think it makes a lot of sense. And so, people say to me, how can I get more income with no risk. You cannot get more income with no risk.

But you can get more income with going a little bit up the risk scale without doing things that don't have as much transparency, don't have as much liquidity. You can really own great companies today where they have terrific balance sheets, high return on equity, and sustainable rates of rising dividends. And that's a good thing.

Morris: And rising dividends, too, I think is important to emphasize. You're not just looking at the size of the yield, you want to see that that dividend can grow over time.

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