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By Jeremy Glaser and Josh Peters, CFA | 06-06-2013 03:30 PM

High-Quality High-Yielders Still the Best Game in Town

Josh Peters tells markets editor Jeremy Glaser that he still sees attractive values in dividend stocks.

Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. Many high-yielding sectors have hit a rough patch in the market recently. I am here with Josh Peters--he's the editor of Morningstar DividendInvestor and director of equity-income strategies at Morningstar--to see if it's opened up any opportunities. Josh, thanks for joining me.

Josh Peters: Good to be here, Jeremy.

Glaser: So let's talk a little about performance. I know you don't focus too much on short term, but what have we seen over the last couple of weeks in terms of higher-yielding sectors? What do you think is happening out there?

Peters: I think we're riding down a mountain we never should have climbed in the first place, to be honest. I've honestly become more bullish on a very long-run outlook, not just for dividend-paying stocks, but for all stocks, and starting to feel like the sins of the bubble in the late 1990s have been paid for. So I'm really not that surprised to see that the stock market is up here again this year after having been up the year before by a pretty good margin.

But when we got to the first quarter and you see the S&P 500 is up 15% or so, and it's high-quality, high-yielding stocks that are actually leading the advance, with returns more in the neighborhood of 18%, 19%, 20%, like my own portfolio's had--OK, this isn't really how it's normally supposed to work. Normally, a market is up a lot in a short amount of time. You expect this defensive low-beta, high-yield, boring stuff to underperform; that's just their nature. And then they outperform, they hold up much better in the big down markets.

But there was some momentum factors I think that came into the market. I mean, people were just getting on a train they thought was leaving the station, not knowing that this is a train that you're supposed to ride for 5, 10, 20 years. This isn't about a short-term dividend trade, as so many people in the financial punditry have referred to it.

So when the market started to turn and you saw a little blip up in interest rates, I'm not that surprised that we've seen the higher-yielding, higher-quality stocks actually leading to the downside, because they probably hadn't deserved to get as high as they had earlier in the year.

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