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By Jeremy Glaser and Josh Peters, CFA | 07-23-2012 11:00 AM

Dividend Investors: Check Into Energy Stocks

Recent underperformance has made energy a more interesting sector for dividend investors, says Morningstar's Josh Peters, who recommends this undervalued, utility-like energy name that has strong dividend growth prospects.

Jeremy Glaser: For Morningstar, I'm Jeremy Glaser.

Investors are still scrambling to find yields, and dividend-paying stocks are one place that they've been looking.

I'm here today with Josh Peters, editor of Morningstar DividendInvestor, to get a performance update on dividend-paying stocks and see if they are in a bubble or not.

Josh, thanks for talking with me today.

Josh Peters: Good to be here.

Glaser: So let's just take a quick look back at performance so far in 2012 for those higher dividend-paying stocks. What have you seen, and has it changed at all as we went through the second quarter?

Peters: It really changed quite a bit. You roll back to the first quarter of the year, the S&P 500, that being the best proxy for the market overall, it was really on a tear, up more than 10% in total return terms in the first quarter. And your higher-yielding stocks, the ones that investors are most likely to favor for those big dividend checks, were really sitting by the sidelines. You didn't see a whole lot of capital appreciation, frankly, at all.

But once we moved early in the second quarter, and some of the economic news started to deteriorate, people became more concerned yet again about the situation in Europe, you started to have this process of risk aversion take hold where as the market sold off, then dividend-paying stocks really weren't selling off, at least the higher-yielding ones weren't selling off so much. And since then, the market has recovered--still a pretty good year-to-date gain for the S&P 500--but now dividend-paying stocks are really right up there among some of the market leaders, and that in turn has kind of reinstated the problem that we've had, or I should say headwind that we've had, in terms of valuations for some time.

Glaser: So you did mention that we've had that valuation headwind. What's happening with dividend stocks' valuations right now? Are there some sectors that are more attractive, less attractive? Is there really a bubble there of people plowing money [into dividend stocks] to get that extra yield?

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