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By Kathryn Spica, CFA | 10-26-2012 09:00 AM

Are Dividend-Payers Overvalued?

Although there are pockets of overvaluation among dividend stocks, Invesco's Meggan Walsh also sees opportunity in today's environment, including consumer-staples names.

Kathryn Spica: Hi, I'm Kathryn Spica for Morningstar, and I am joined today by Meggan Walsh, portfolio manager of Invesco Diversified Dividend.

Meggan, thanks so much for being with us today.

Meggan Walsh: Thanks for having us.

Spica: To start off, there's been a lot of talk about people rushing into dividend-paying funds, and there was a strong run in 2011. Are dividend payers overvalued today?

Walsh: I certainly think you can make a case that there are pockets of overvaluation within the dividend-paying universe, but I think that would be universally true across all 10 economic sectors of the broad market as well. So, we think it's a little imprudent to make the blanket statement that dividend-paying stocks are overvalued. We see opportunities in all 10 economic sectors today.

Spica: Could you talk a little bit about some of the opportunities that you see in some of the dividend-paying sectors. Specifically, utilities and consumer staples are being parts of your portfolio. Where are you seeing value in those sectors?

Walsh: Sure, they are big parts of our portfolio. But right now today, we're very positive on the consumer staple stocks. Traditionally, they've had the ability to pass through inflation to the tune of 1% to 3% of price realization. For investors that are worried about inflation going forward or protecting inflation in their portfolio, we think consumer staples are a great place to start. They're traditionally run very conservatively by management teams. Conservative meaning great allocators of capital on their balance sheet. So, when we look at the valuations for consumer stables, we think they're very attractively valued here, particularly in this part of the earnings cycle when we're more worried about the durability of the margin profile of the more cyclical areas of the economy than we are of the defensive areas of the economy.

Spica: So, you avoid some of the cyclical players in the energy space. Could you talk a little bit about how you look at that sector as well?

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