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By Josh Peters, CFA and Jeremy Glaser | 02-23-2015 11:00 AM

3 Dividend Picks for Your IRA

Reinvested dividends from GE, P&G, and Spectra Energy could boost an IRA over the long term, and the stocks also trade at attractive valuations today, says Morningstar's Josh Peters.

Note: This video is part of Morningstar's February 2015 Tax Relief Week special report.

Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. It's Tax Relief Week here on Morningstar.com. I had a chance to sit down with Josh Peters--he's the editor of Morningstar DividendInvestor newsletter and also our director of equity-income strategy. He talked to me about why dividend payers could be a good choice in an IRA, and he also shared three top ideas.

Josh Peters: The advantage, I think, of concentrating your dividend payers in an IRA is that you have the ability to reinvest all of your income, perhaps for decades, before you need to start making withdrawals from the account, and those dividends can be compounded tax-free--not that there's anything wrong with receiving dividends and having to pay some tax on it, especially if you are, in fact, withdrawing that from your portfolio. But in an IRA where you can reinvest, I would say to look at situations that perhaps are going to take a long time to play out but have a very good chance of playing out effectively and where valuations at the beginning of your investment here would be most attractive.

I would start with [General Electric (GE)]. This is a name where, honestly, I worry about having eggs thrown at me when I pitch it in front of audiences. The stock has had a really rough 15 years of going down and then going down and then rebounding and then kind of going nowhere here since the crash. But what's going on behind the scenes is that CEO Jeff Immelt and his team are radically reshaping the portfolio of businesses that are paying these dividends.

It's going from more than a 50% position in financial services accounting for the earnings that, in turn, fund the dividend back prior to the crash to a 75%/25% split in favor of their industrial businesses. And that's where their moat is widest, where the company is most efficient, where it's going to generate the highest incremental returns on capital. This transition has been kind of a drag because you take money, repatriate capital out of financial services, and look to redeploy it in your industrial business. There is a little bit of a timing mismatch. You're not immediately going to replace all the earnings, but GE has grown its dividend every year through this transition, and now that they are looking at 2016 being the year where the mix levels out, I think you are going to have faster earnings growth and, with that, faster dividend growth.

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