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By Josh Peters, CFA | 01-07-2015 05:00 PM

Peters: Dividend Outlook for 2015

Repeating a stellar 2014 will be tough for REITs and utilities, while some higher-yielding multinational firms are much more attractive today, says the Morningstar DividendInvestor editor.

Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. I'm joined today by Josh Peters. He is the editor of Morningstar DividendInvestor newsletter and also our director of equity-income strategy. We're going to take a quick look back at 2014 and see what 2015 might hold for dividend payers.

Josh, thanks for joining me.

Josh Peters: Thanks for having me, Jeremy.

Glaser: Let's quickly take a look back at last year. When you look at the performance of your portfolios--and dividend payers, in general--how did they do compared with the broad market?

Peters: Dividend investors had a pretty good year, I think it's fair to say. In general, we're taking less risk. In statistical terms, we have lower standard deviations and lower betas than the market overall. And so when the market does well, has an above-average year--and it was an above-average year for the S&P 500 last year with a total return of 13.7%--it's not unusual to expect [dividend payers] to lag a little bit.

But within that experience, it's really a tale of two camps. There are the REITs and the utilities that frankly shocked a lot of people with how high their total returns turned out to be, close to 30% for these groups--in fact, a little better than 30% on some REIT indexes last year. [In comparison,] the other types of dividend payers, your big multinational, industrials, and staples firms--also very popular with the core of many dividend-paying portfolios--suffered rather poor years. And macro factors explain a lot of these divergences. The higher-yielding stocks, the REITs and utilities with very steady cash flows, they benefited incredibly from the surprise drop in long-term interest rates.

On the other hand, your big multinational staples, a Coke (KO) or a P&G (PG), those names didn't do quite as well because they weren't benefiting solely from economic growth picking up here in the U.S. They have a lot of exposure overseas--emerging markets, Europe--where the economies are not doing as well. And the strength of the U.S. dollar has been a real headwind for earnings and for dividend growth for those names.

So, this has played out essentially in our model portfolios, our Builder versus our Harvest. We've got those big multinational growth-and-income types of stocks; we had a total return of only 4%. Our Harvest, where our REITs and utilities are, that portfolio returned over 22% last year. So, a good overall result, but the best portfolios I think were the ones that maintained a good balance of both types of stocks and not just one or the other.

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