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By Jeremy Glaser | 11-05-2010 02:38 PM

Peters: No Margin of Safety in Market Today

With few bargains remaining in dividend stocks, investors should be focused on buying the highest quality firms says Morningstar's Josh Peters.

Glaser: I'm Jeremy Glaser with I'm here at the 2010 Morningstar Stocks Forum joined by Morningstar DividendInvestor Editor Josh Peters to see what to do when you don't see a lot of good options in the dividend market.

Josh, thanks talking with me.

Peters: Good to be here.

Glaser: A lot of people have been looking for great yield picks. I know you get asked all the time and we're always pushing you to give us new names, but sometimes there just aren't a lot of really great options in the marketplace. Is that what you're seeing right now?

Peters: Unfortunately, it is, and I guess that's part of the honor, commitment or something of somebody in my position. I was looking out over the investment landscape and trying to provide good reasonable conservative investment recommendations. It's that some times you just have to fess up and say that the cupboard is bare or at least in this case the cupboard is bare in terms of the traditional sorts of bargains, margins of safety from Graham and Dodd language that you want to try to find even among good businesses. It just very tough right now.

Glaser: If it's so difficult to find those kinds of bargains, but you still have money that you want to put into long-term equities that you need that yield what should you be looking at right now then?

Peters: Well, to me I think you have to start by evaluating your time horizon, which is, am I able to put capital to work for a 5, 10, 15, 20-year type of time horizon. Whether it's before retirement or after retirement. Can I keep the capital at work for a very long period of time, enough to smooth out a lot of the volatility, a lot of frankly uncertainty that is going to transpire even over relatively long time horizons from here.

If you can't, then you just kind of have to stick with money market instruments and cash and CDs at the very short end, because there is just no way of guarantying or even having a lot of confidence in the ability to get your money back when you might need it. So, it has to start with that long-term time horizon.

Then I think you spread the menu out and you look at is there a cash component that you want to try to time the market with, maybe you can get stocks cheaper or bonds cheaper. I think that's a poor strategy as part of a permanent deployment of capital just because how will you know when the market is cheap enough to actually get in. You might miss the downswing and miss the upswing with that approach. So, to me it's really coming down to the sort of the bond versus stock debate. Or nearly you'd think well bonds should be for capital preservation and some amount of income in stocks for the growth. But bond yields are so low right now even over long durations that they are not providing a lot of income and they are presenting frankly a lot of risk in terms of future inflation.

So, I almost feel cornered, I might like to have a very balanced strategy, I feel I'm essentially being forced in the stock market even though it's not objectively cheap, because it's only stocks that are capable of generating those real returns that can compensate for inflation actually put your head at the end of the day. And even then from there you have to be very picky, it's not just dumb market in general. Remember the yield on the stock market in general right now is still under 2% that's still not great. You have to be very picky within the stock market, what's kinds of individual companies you want to invest in.

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