Where should you and your clients be looking for investment gains?

That seems to be a tough question considering the recent market surge.

You look overseas, or to some parts of the fixed-income market, but if you’re looking for domestic stocks, you may have a tough time coming up with an answer.

After a year of high-octane gains in the markets, most investments look fully valued. In fact, in the upcoming issue of On Wall Street, we examine just how stellar mutual fund performance has been lately.

Still the question remains: After stocks have seen gains in the triple-digits, where do you turn?

Well, you could hope for a repeat. After all, someone out there will shoot the lights out two years in a row. But the rest of us might find some opportunities in dividends.

It may sound strange to mention dividends like it’s a novel approach - after all these were the investment of choice during the downturn - but we’ve had over a year of recovery since then, during which time many investors shied away from dividends, as is expected during a recovery.

After all, what fun is a 2.5% dividend yield when others are buying bank stocks at $1 per share and watching them zoom to $5 per share?

The dividend yield of the S&P 500 is about 1.9%, compared to the historical norm of around 4%. When looking for specific stocks, Josh Peters, the editor of Morningstar Dividend Investor, suggested looking at the traditional, higher-quality dividend-paying areas of the market like utilities and some healthcare names.

Some investors are shying away from healthcare now because of the uncertainty that new regulation will bring, but Peters thinks that any negatives will be more than offset by the greater number of customers for healthcare companies.

And indeed, as more retail investors start looking for dividend stocks, Peters predicted that those higher-quality names will be the focus of their attention.

Johnson and Johnson is one such stock. The health care products company raised its dividend this week by 10% to 54 cents, marking the 48th consecutive year of dividend increases. It also posted first quarter earnings of $4.5 billion, a 29% increase, although $900 million of that came from a one-time gain from litigation.

If your clients prefer utility companies, Ameren is paying one of the highest dividend yields, at close to 6%.  And telecom giant Verizon, despite posting a drastic decline in quarterly earnings, is still over 6% in dividend yield.

The larger question, of course, is do your clients really want to look for dividends now that stock prices are soaring? But sometimes, investors and advisors need to remember that when everyone zigs, it just might be the best time to zag.

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