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By Josh Peters, CFA | 01-27-2014 03:00 PM

Peters: Pay Up for Quality Dividends

It's better to buy higher-quality names at fair value prices than to seek outlier bargains in an elevated market, says DividendInvestor editor Josh Peters.

Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. We recently received a reader email asking if it makes sense to remain fully invested in a dividend-paying portfolio given how valuations have moved higher. I'm here with Josh Peters, editor of Morningstar DividendInvestor and also our director of equity-income strategy, to answer this.

Josh, thanks for joining me today.

Josh Peters: Good to be here, Jeremy.

Glaser: Let's just start with that basic question: Does it make sense for individuals to be fully invested right now, or should they be keeping some power dry in case there is a sell-off and they could take advantage of those opportunities?

Peters: This question is actually one that's just a little bit beyond my pay grade. In DividendInvestor, we have two model portfolios. In our Builder portfolio, which is oriented around yields in, say, the 3% to 4% range, we try to maximize dividend growth and with that long-term capital appreciation. And our Harvest portfolio is looking for yields kind of in the 5% range but also demanding income growth from all of the stocks that we own.

Those two portfolios, I try to keep them as fully invested as possible. To some points, I've been invested almost down to the last couple of dollars in these two accounts that both have six-figure real money account balances with them. And that's because DividendInvestor is really oriented around picking good individual stocks for income. The only reason I'm not going to try to be fully invested is literally if I cannot find anything to move new cash into that doesn't meet my standards; one of which is, I'm willing to pay up to fair value, our fair value estimates, for high-quality stocks that have good dividend characteristics.

When I'm fully invested, I'm trying to optimize the number of recommendations that I'm able to provide to subscribers, but the message there is not that everybody should be 100% invested all the time in dividend-paying stocks. For most people, I think a high-yield and growing, quality dividend strategy is a very important piece of their portfolio plans or should be, but it shouldn't necessarily be the whole thing.

You want to think for yourself about how much you want exposed in equities, if you want to devote some funds to more growth-oriented investments or even some speculation with a little tiny bit of money over in the corner, or how much you might want devoted to bonds. You don't want to look in DividendInvestor for answers of how much of those different types of other asset classes and other styles you should own. It's essentially beyond the purview of the newsletter.

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