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Market Highs Are Masking Opportunity in Dividends: Cohen

Jeff Macke
Breakout

It's been more than four-and-a-half years since the stock market lows of 2009. Since then the S&P 500 (^GSPC) has gained more than 120% and gaining steam. Momentum investing rules the day. Against that backdrop, Hersh Cohen of ClearBridge Investments has a paradoxical approach towards preserving capital. To Cohen this isn't the waning days of a bubble. As far as he's concerned we're living in the golden age of dividends.

Cohen is finding income growth potential for the long-term in blue chip stocks. , but as companies look for ways to get capital back to shareholders in a slow-growth world, dividends are climbing.

If investing for dividends seems somewhat retro, that's because it is. Cohen says that dividends are used to account for 30% to 40% of the expected return of a portfolio. Due to changes in tax laws and growth opportunities in developing nations, emphasis was taken off the traditional valuation models in favor of growth at all costs.

Cohen isn't a trader, but as he sees it the price of growth is getting inflated at this point in the market. What he's looking for are companies with solid balance sheets and demonstrable concern for shareholders. "This year, what's incredible is you don't have to look very far beyond really quality companies to find 13% to 14% on average dividend growth for a lot of great companies."

For all its strategic confusion, even Microsoft (MSFT) is kicking off a decent dividend of over 3% while participating in the rally. The stock may get some steam taken out of it, but Microsoft's balance sheet is going to let it kick cash back to shareholders for the foreseeable future.

To be clear, he's not claiming that blue chip dividend plays are going to be impervious to a correction. Money isn't going to come out of the woodwork to snap up companies because of a 2% yield. But when stocks finally correct, those same companies kicking off 4% or 5% start to look attractive. Among his favorites are Johnson & Johnson (JNJ), Proctor and Gamble (PG) and Kimberly Clark (KMB).

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