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By Jeremy Glaser and Josh Peters, CFA | 02-22-2013 12:00 PM

Don't Fall Victim to the Next Dividend Cut

With more firms decreasing (or eliminating) their payouts, DividendInvestor editor Josh Peters highlights what investors should look for to ensure stable, long-term dividend income.

Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. I'm here today with Josh Peters. He is the editor of Morningstar DividendInvestor and also the director of the equity-income strategy at Morningstar. He will be hosting a free webinar on Tuesday, Feb. 26 on dividend-investing strategies.    

Josh, thanks for joining me today.

Josh Peters: Thank you, Jeremy.

Glaser: So, let's talk a little bit about dividend investing. If it makes sense for people looking for income right now, with the stock market looking pretty fully valued, does it still makes sense to look at those dividend-paying stocks as an alternative to bonds or to other areas that people might be looking for cash?

Peters: I think it does. I mean there are a lot of people who are concerned about some higher valuations in this area of the market. I'll be the first to admit, you look at the multiples on, say, packaged-food stocks, tobacco stocks, utilities, and REITs in particular, they don't really look that appealing. But we're also in an environment here where I think we're going to be looking at a combination of low economic growth, low corporate profit growth as a consequence, and low interest rates for very long period of time.

So, you have to consider your opportunity set and the way I look at it is, you can go into bonds and lock yourself into very bad relationships with issuers, very low-yield relationships with issuers for many, many years that can really clobber you if inflation starts to move up and interest-rates start to move up. You could just sit on cash, but of course every day you sit in cash, you earn nothing, and you are losing purchasing power because of inflation. And you can also go back into equities, with just the same-old buy-low/sell-high strategy that works until it doesn't.

And one of the things especially for people who are coming back to the stock market--the risks have gone down, maybe the road ahead is not going to be so rocky as the last 10 or 15 years--do it right this time. And that is get back to the understanding that even stocks are principally about the dividend income and the growth of the dividends over time. It's not just a growth story. It's not just a capital gains story. It's about the income and the capital gains that are encouraged by the growth of that income over time.

So if this is a strategy that works to suit your financial needs, your eventual desire to retire and be able to fund your retirement from a 401(k) plan, for example, then this is not a bad time. In fact, it's a great time to make that strategic choice and start to migrate your portfolio in that direction.

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