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By Jeremy Glaser and Josh Peters, CFA | 09-24-2013 01:00 PM

What No Taper Means for Dividend Investors

Since the taper talks began, conditions have improved for dividend investors, who can now buy quality names without being vulnerable to long-term interest-rate spikes, says DividendInvestor editor Josh Peters.

Jeremy Glaser: For Morningstar, I’m Jeremy Glaser. What do dividend investors need to know about the Fed’s decision not to taper its bond purchases? I'm here with Josh Peters; he’s the editor of Morningstar DividendInvestor. He’s also Morningstar’s director of equity income strategy. We're going to talk about some of the implications.

Josh, thanks for joining me today.

Josh Peters: Good to be here, Jeremy.

Glaser: Many market watchers were really taken by surprise that the Fed decided not to taper. Were you taken aback at all by Fed chairman Ben Bernanke’s decision to stay the course?

Peters: I have a pretty entrenched process of not making explicit forecasts to DividendInvestor subscribers about near-term changes in interest rates, monetary policy, or any other macroeconomic factor. I think they're just too unpredictable. It's much easier to base your portfolio around longer run trends that you actually have some shot of making good decisions with.

But, to be honest, I really wasn’t that surprised, and I was kind of surprised that everyone else is surprised.  The timing has everything to do, I think, with the Fed’s choice. First, you’re coming up on having a new chairperson leading the Fed here in January; you don't necessarily want to change course on existing policies right in front of that.

Second, we're looking at a government shut-down/debt-ceiling crisis perhaps coming up here shortly. Do you really want to start to tighten policy right in advance of a major fiscal event like that? I know the Fed doesn't think of tapering as actual tightening of policy. They think they're still loosening as long as they're still buying bonds, but everybody else would think of it as tightening.

Then third, you still haven't seen any sort of take-off in the economy. The fact that you've got a key player in the economic recovery today, the recovery in residential real estate, being so closely tied to what's going on with long-term interest rates, you don't want to knock that housing recovery off before it has a chance to get up and run on its own. For the Fed to have decided to wait, get more information, and let some of these other events--like a new chairperson and the fiscal drama--things unfold, I actually think it was a pretty smart decision even if most of Wall Street was either puzzled or hostile to the idea.

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