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By Josh Peters, CFA | 07-21-2014 02:00 PM

Peters: Income Picks I'm Adding To

Sometimes you already own your best idea, says DividendInvestor editor Josh Peters, who has recently culled lower-conviction holdings in his portfolios and added to his favorite names.

Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. I'm here today with Josh Peters. He's editor of Morningstar's DividendInvestor newsletter and also our director of equity income strategy. We're talking about where he's finding values in the market today.

Josh, thanks for joining me.

Josh Peters: Good to be here, Jeremy.

Glaser: It's probably not a big secret to any viewer that the market isn't exactly affording a wealth of opportunity right now. How are you thinking about where to deploy any money you might have in your portfolios--be it reinvesting in companies that you already own, looking externally, holding cash--how are you making that decision?

Peters: It ain't easy. I'll make that abundantly clear. Overall, we think that the market is fairly to slightly overvalued at this point here in the U.S. Certainly, dividend yields are very low. There's this recurring debate. It seems like every day there's someone in the papers or on the web or on TV asking, "Are valuations stretched? Are we at the point of a bubble?" I don't think we are there yet, but the converse is also not true. You can't find bargains. They're just simply not in abundance like they were even a couple of years ago.

So, getting and staying fully invested is kind of tough. Earlier this year, for example, back in March, I took a look at my portfolios and I decided to call out a few names where the characteristics had changed--I thought for the worst. These weren't businesses I really felt comfortable owning for the long term. So, now I've got a pile of cash. How am I going to redeploy it? I hoped to find some new individual stocks to buy to replace those names, but it was just very difficult.

What I did, instead, was look at the remaining names in my portfolio and ask, "What can I add to? What can I do with those names to bring their weights up and my best ideas a little bit? Peter Lynch has pointed out before that the best stock to buy may be the one that you already own. I think the key point is this: You want to make sure you're not concentrating your portfolio so heavily on just one name or just one sector; you don't want to leave yourself exposed to those one-off risks associated with just one sector or just one stock.

It's not a bad thing to go, for instance, from owning 25 stocks to 23 or 21. I think that's better--that's preferable to hanging on to companies that maybe you're not comfortable with anymore--whether it's the valuation or the fundamentals of the business--just because you're trying to maintain some specified number of stocks.

Glaser: Let's take a closer look at some names that you've added to recently--the first being General Electric. Why do you still like GE?

Peters: This is a very straightforward dividend-value proposition. The stock has been yielding over 3% for some time now; that's half again or more than you can get from the market overall. The businesses themselves--especially on the industrial side--I think they're world-class. They're not going to be on fire at every point in the cycle. I think, frankly, they are structured in a more defensive posture. They don't ride the cycles in their fields nearly to the same degree as some other companies might. So, maybe some other companies look like they're doing a little bit better right now; but since 2010, [GE's] dividend has been on a nice recovery track. It was cut back in 2009. That was really painful. But I'm not going to hold that against the stock--with management having just demonstrated both the wherewithal to bring that dividend back and grow it over time as well as the determination to do so.

I think it's pretty reasonable to expect long-term dividend growth. I'd say about 8% per year. And you almost wind up, I think, with bond-like consistency from a company like this over longer periods of time. I know people remember when the stock was worth $50 or $60 almost 15 years ago--back in the bubble days. A lot of people just don't want to hear about GE anymore. They just hate it. I think that creates opportunity. And when you're being paid to be patient--to the extent that you are with GE right now--I'm willing to be patient, even if the stock is not popular.

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