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Choose Your Dividend Stocks Wisely, Says Fort Pitt’s Smith

Choose Your Dividend Stocks Wisely, Says Fort Pitt’s Smith

It's been a week since Japan's one-day crash rocked financial markets around the world, but in some ways, the ramifications are only now starting to play out here. While the S&P 500 has shed about half a percent in the past week, the real action has been in the bond markets, where yields have extended a month-long ascent to levels not seen in 16 months.

The increase in market rates has had the biggest early impact on the utility sector (XLU), as its heavily indebted and high yielding components look less attractive on at least two fronts.

As Charlie Smith, the chief investment officer at Fort Pitt Capital explains in the attached video, it's still a good time to own dividend paying stocks, but there's a catch.

"I think you can (get good dividends) as long as you're not stretching for the extra yield," he says, singling out MLP's as an industry he thinks is ''ripe for some disappointment."

As for utilities, even though they are now down 11% from a five-year high set just four weeks ago, Smith says they're still not attractive to him as he prefers more cyclical companies.

"If you can find the names that have natural gas as their fuel you may find some decent opportunities," he says, "but the base level of demand for power has still not come back in any sort of a normal way in this recovery."

Generally speaking, he likes to own stocks that have plenty of free cash to pay their dividends or what's known as low payout ratios, as well as a track record of raising their dividend too. While some have marked the run-up in Treasury yields with a great deal of caution, (the 10-year yield is now higher than the dividend yield on the S&P 500) Smith argues that "rising yields signal a strengthening economy."

"I think it's a signal that all the efforts at money creation by the Fed are starting to gain some traction," he says, pointing out that "we can have a very weak bond market but a decent economy at the same time."