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By Josh Peters, CFA and Jeremy Glaser | 08-26-2015 03:00 PM

Dividend-Payers Mostly Weather the Pullback

Although utilities took a particularly strong beating and energy continues to look shaky, the overall backing for dividends across most of the market still looks solid, says Morningstar's Josh Peters.

Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. What impact will the recent market volatility have on dividend-payers? I'm here with Josh Peters--he is the editor of Morningstar DividendInvestor newsletter and also our director of equity-income strategy--to look at how the sell-off impacted his portfolio.

Josh, thanks for joining me.

Josh Peters: Good to be here.

Glaser: Could you talk a bit about how the volatility we've seen over the last couple of days has impacted the sectors that have most of the dividend-payers in them?

Peters: Early on, it seemed to be kind of a traditional correction. We saw utilities and REITs and staples hold up better than the market overall. That's kind of what you'd expect. These are lower-beta names. They tend to be less volatile. And then as we got closer to Tuesday--I don't know if I want to call it the first bottom--we actually saw that utilities were the worst-performing group. It seems to me that maybe with these stocks that are counted on for being more stable and certainly pay those nice dividends that a lot of individual investors want, you were seeing people react to a very fast-moving correction in the stock market and saying, "I want out"--even though these are stable names. We saw the price for Duke Energy (DUK), for example, hit a 52-week low, and the yield is closing in on the 5% mark. That, to me, doesn't really make any sense. This is the opportunity, I think, to buy a name like that and make that a cornerstone of your income strategy for the long run.

Glaser: You mentioned that this is a fast-moving market, but did you see any broad areas of opportunity open up? You mentioned Duke. Are there other areas that you think are worth staying on investors' radars?

Peters: It's been a curious market for a while--for a number of reasons. One is this preposterously narrow trading range that we were in all year up until now. Within that range, there haven't been a lot of bargains, and lots of stocks have been trading at all-time highs even though fundamentals for businesses that have a lot of nondollar exposure or exposure to emerging economies and commodities, their earnings were eroding. And yet, the market overall has been hanging out at this very high level. [Then, the market] shocked us with a 10% or greater decline, and there weren't really a whole lot of names that, all of a sudden, jumped off the page as bargains that weren't already relatively attractive [before the correction].

The way I like to think about it is that my best idea is not just whatever stock has gotten the cheapest; my best idea is my portfolio as a whole. And in this move, we saw my portfolio's yield, which had been right around 4% or 4.1%, jump up to 4.5% at the top. To me, that means that from that starting point, I'm likely to collect the benefit of that extra 0.5% of yield almost forever. Certainly, I expect prices at some point will come back; my portfolio now looks undervalued on a price/fair value ratio basis, using our fair value estimates. But I want to earn higher yields, and I want the opportunity to compound faster. Since the portfolio as a whole already has diversification in place--it's spread out among a number of different sectors so that it doesn't have the risk of any one stock--I feel like it's a good time to be sticking with your strategy and being able to reinvest your dividends. And if you're adding capital to your portfolio, it's better to do it at lower prices as opposed to high prices. I never thought during this volatility that this was a once-in-a-lifetime or once-in-a-generation type of opportunity for anything. In fact, it should be more routine. And perhaps if it hadn't moved so quickly, we would think of it as just kind of a routine pullback in the stock market.

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