Where are the opportunities--and land mines--among dividend-paying stocks right now? To help answer those questions, I recently sat down with Josh Peters, Morningstar's resident dividend guru and the editor of Morningstar DividendInvestor. In last week's Improving Your Finances, Josh provided some of his best ideas. In this week's installment, Josh provides his outlook for some traditionally high-yielding sectors.

Christine Benz: One area of the dividend-paying universe, financials, has obviously been through a lot of turmoil. Can you discuss your outlook, as well as whether you've found anything attractive?

Josh Peters: That one's tough, because virtually all of the banks in this country of any size have reduced their dividends. A lot of banks had to cut their dividends because they were generating losses and you can't afford to deplete your capital base by paying out capital as dividends when you're also losing money. But there was also an awful lot of pressure from regulators and even from Congress, that once the government was starting to lend direct support to financial institutions, they didn't want to see those same institutions paying large dividends. So, even banks whose financial strength might have allowed them to maintain their dividends had to succumb to that pressure.

The way I look at the financials sector right now, at least as far as the banks go, is that it's really a dividend-recovery and dividend-growth story. Wells Fargo (NYSE:WFC - News) is a good example. Right now, they're only paying out $0.05 a share each quarter. Before that, they were paying out $0.34 a quarter. So, your income got clobbered if you owned Wells Fargo, but the bank's earning power did not get clobbered. Because they were in a position of strength going into the crisis, they've been able to capitalize on that by acquiring Wachovia. It's now a much larger institution that should be able to do a very good job of growing that business and recouping the profitability lost during this cycle. You'll probably wind up with Wells Fargo paying a dividend a couple of years from now that is higher than it was before the crash. But it will take three, five, maybe even six years to get there.

US Bancorp (NYSE:USB - News), another outstanding lender, has a lot of the same characteristics. Its corporate DNA was to return the bulk of earnings to shareholders, either through dividends or share buybacks, and they've been very disciplined about how they've done it. I don't think they saw the crash coming, but one of the interesting indicators of who was going to turn out to be a strong financial institution through the crisis was, were they losing market share in 2005 or 2007, when total lending was shooting through the roof? If their asset growth was actually slowing down, it meant that they were being careful, they were being disciplined, they were willing to let other people make the bad loans. And if they had to grow more slowly, if they had to lose market share, fine, they were still going to be standing once the bad lenders had collapsed. The worst banks, the ones that made the dumbest loans, are already gone. Washington Mutual is gone, IndyMac is gone. Wachovia made a lot of bad loans, and they're gone. Countrywide, they're gone. The dumbest lending capacity is out of the market, and that means that competition for lending should be much less, it should be much more rational, and pricing should be better. I know it sounds almost crazy to say this, but I think the banking industry could be more profitable a couple of years from now than it was a couple of years ago.

Benz: Let's talk about the real estate area, which has historically been a source of rich dividend yields.

Peters: Actually, it's been the source of a tremendous amount of pain! Most REITs have gotten into trouble, to one extent or another, because they buy real estate, which is a very long-term asset, but they were financing it with short-term money. That meant that when the party stopped, they were still going to have debts coming due but they weren't going to be able to liquidate assets in order to pay down their obligations. A lot of REITs were, frankly, property flippers that would've been home watching these real estate shows on television. The idea is that it didn't matter how much you paid today, because the value of the real estate was only going to go up, and then you'd sell it, and then you'd buy something else. Well, that game couldn't go on forever, because the value of commercial real estate is ultimately going to be a function of how much income it generates.

I think the two best REITs that are available to income-seekers these days are Health Care REIT (NYSE:HCN - News) and Realty Income (NYSE:O - News). Those are businesses that are structured to provide consistent dividend income to shareholders. Realty Income is in retail real estate; Health Care REIT has skilled nursing facilities, medical facilities, senior living facilities, and so on. But when they buy a property, they provide long-term financing for it, so they're locking in a spread between the rent income that the asset is going to generate and their cost of capital upfront. And they don't look at having debt coming due constantly that is going to require refinancing if they want to hang on to the asset.

The market value of their real estate really doesn't matter. What matters is what kind of income is it generating and can they cover the finance costs and the dividend they're paying to their shareholders. Both businesses have structured themselves in a way to do that.

Benz: Last time we talked about them, back in March of 2008, I remember you thought the utilities were notably overvalued.

Peters: That has changed significantly, both on a relative- and absolute-value basis. I've been a buyer of utilities in the last couple of years, and I'm continuing to find good value prospects there. We've seen valuations come down. It's a very attractive business model from the standpoint of a conservative investor. You're not likely to get rich owning regulated utilities, but they can provide you with income and stability. I would add, too, that we've seen very few dividend cuts in the utilities sector.

Benz: So, what are your favorites?

Peters: NSTAR (NYSE:NST - News) is one I think is quite outstanding. It runs a very tight operation. It's strictly a transmission and distribution utility, which tends to be a very steady business. The cost of power is passed right through directly on to customers' bills, and then there is an additional charge on the bill that is just for providing the delivery of energy, whether it's natural gas or electricity. In Massachusetts, NSTAR has worked hard at managing the grid effectively for reliability and helping customers reduce demand and improve energy efficiency; in turn, the Massachusetts regulators have allowed them to earn very good returns on capital. They should be able to grow their per-share earnings and dividends 6%, maybe even 8%, a year. And that's on top of a 4 1/2% yield.

Benz: You've long been a fan of master limited partnerships. Why do you like them?

Peters: Very few mutual funds own MLPs; they're very complicated and cumbersome for an institutional investor to own unless they're devoting themselves to it. A lot of individual investors can't own them, because a lot of the money out there is in tax-deferred accounts, where it's really impractical and unwise, I would say, to own these partnerships. So you've got a marketplace where demand for these units is hampered. Then, on the supply side, these partnerships pay out almost all of their cash flow, which means that when they want to expand, they issue more units. So you've got more supply coming to market almost continuously. When there's a lot of supply and not a whole lot of demand, valuations are going to be relatively low, and those valuations translate into very good yields. If just anybody could own partnerships the way anyone can own REITs, I would imagine that multiples would be higher, yields would be lower, and you wouldn't have the same kind of value prospect available to individual investors dealing with taxable money.

Most of the assets that are owned by MLPs are in energy logistics--energy transportation as opposed to energy exploration and production. The economics of a pipeline are not that much different than the economics of a utility, except that pipelines have a better regulatory regime than most utilities do. They earn higher profits and higher returns on capital than utilities do.

Christine Benz does not own shares in any of the securities mentioned above.