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Portfolio Update

Strategy Review

By Roger S. Conrad, on Apr. 2, 2014

Unfortunately, finding value in traditional dividend-paying security classes has become increasingly difficult; the Federal Reserve keeping interest rates near zero has prompted income-starved investors to bid up the shares of many stocks that offer above-average yields.

The Dow Jones Utilities Average yields about 3.7 percent, while investors looking for at least a 3 percent yield from a bond or bond fund must assume an inordinate amount of credit or inflation risk. And good luck finding a bank certificate of deposit or money-market account that yields much more than 1 percent.

Meanwhile, with the Fed slowly but surely winding down its extraordinarily accommodative policies of recent years, fixed-income securities will come under pressure.

Annual returns for dividend-paying equities, however, tend to follow trends in the stock market and fare better when the US economy strengthens. Regardless of what the talking heads say, many stocks that pay dividends exhibit little correlation to interest rates.

Nevertheless, all too many investors class any stock that offers an above-average yield as a bond surrogate. The panic-driven downdrafts that occur whenever the Fed mentions the potential of raising interest rates give savvy investors an opportunity to buy high-quality names at favorable prices.

Selectivity will be critical to outperforming the market in coming quarters. Many stocks that offer high yields entail higher risks and lack the underlying business strength to support their payouts over the long haul.

But with the bull market entering its sixth year, investors need to think unconventionally to find stocks that offer high yields, good value and the prospect for sustainable dividend growth.

The following areas have proved to be fertile hunting ground for our Lifelong Income Portfolio.

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