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By Josh Charlson, CFA | 06-13-2013 04:00 PM

Why Yield-Seekers Should Eye Foreign Dividend Stocks

JP Morgan's Ann Lester says the relative advantage of high-yield assets is waning and that non-U.S. dividend-paying stocks can offer broader diversification and better total return.

Josh Charlson: Hi. I’m Josh Charlson with Morningstar. I am here at the Morningstar Investment Conference to talk about initiatives of great concern to investors, and that is: How do you generate yield in a market where yields are very low? To help us with that question, we have Ann Lester from JP Morgan. Ann is a managing director at JP Morgan and oversees a number of the portfolios there, including JPMorgan Income Builder and the SmartRetirement target-date funds.

Thanks for being with us, Ann.

Ann Lester: Thank you, Josh.

Charlson: So, as I framed the question, real and nominal yields are both very low from historical levels. So investors, if they want to find yield, it seems like they have to go out on the yield curve or go into riskier sectors or asset classes. Is it worth it for investors to be out there looking for yield in that way? What is your view on the question?

Lester: Well, it's hard to answer sort of generically "Is it worth it?" I think every investor or every advisor has to really try to understand what that particular client's goals and objectives are. Certainly, I don't think you can try to keep yields stable from where they are right now, or increase them without also increasing risk, and I think that didn't used to be true. Last year or the year before you could really get higher yields, you could really expand into new asset classes for some investors, without having to stretch on the risk side, and I don't think that's true anymore.

Charlson: Talk a little bit about your asset-allocation process in the Income Builder fund, where yield is more of a focus for you. You’ve a pretty wide landscape of asset classes you can use. How do you determine what you're going to look at and what are sort of the risk factors that you're looking at, as well?

Lester: So just about any asset class that generates yield we want to consider for the fund. And the team really tries to generate an 18- to 36-month forecast with insights from the bottom-up managers in the individual asset classes to help us understand where we see relative attractiveness from a yield perspective and to understand what we're going to be paying for that in terms of volatility and where those correlations are going. Really as a result of the entire globe rushing into the search for yield, we've seen those yields compress everywhere. The more obvious places that we were going for yield, like high yield, for instance, we think are maybe not played out, but certainly less interesting relatively speaking. Some other parts of the financial world, like the equity market, we think still represent some interesting opportunities, not just because of the yield, but also because of the total return.

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