* Siegel says stocks have a ways to rise still
* Dividend paying stocks best bet right now
* S&P 500 stock valuations well below averages
By Joseph A. Giannone
SAN DIEGO, Feb 3 Wharton School Professor Jeremy Siegel, author of the investing classic "Stocks for the Long Run," says the ongoing stock market revival is far from over, but warns U.S. Treasury bonds are due for a fall.
Siegel contends that a diversified basket of stocks -- looking way back to 1802 -- has outperformed every other asset class by leaps and bounds. Over that time, stocks have delivered annual inflation-adjusted returns of 6.7 percent a year.
Based on that same 209-year trend line, stocks still have some significant room to rise, even after back-to-back years of double digit gains.
"People say the market is ahead of itself? It is nowhere near ahead of itself," Siegel told a room of 2,400 financial advisers and other executives at the TD Ameritrade Institutional national conference.
By his calculations, the S&P 500 Index of large-company stocks is about 20 percent below that long-term trend line.
Siegel says his bullishness on stocks was proved right when stock markets hit bottom in March 2009. Since then, stocks have rallied to within 15 percent of their 2007 peak.
"We're going through a stealth bull market," he said, noting the S&P index of 400 mid-cap stocks recently reached a new record high.
There are many investors who worry the U.S. economy is still shaky, as shown with stubbornly high unemployment rates, and that the bull market is not sustainable.
Critics point to the poor returns of stocks in the past decade, to which Siegel responds that the S&P 500 in the past 20 years delivered returns at exactly the long-term rate of 6.7 percent.
Siegel was far more negative about Treasury bonds, which after a decades-long bull run offer only thin yields even for long duration bonds. Short-term bonds pay almost nothing and run the risk of generating capital losses if benchmark interest rates start to rise.
Stocks, furthermore, are historically cheap, he said. Excluding years when interest rates were more than 8 percent, and presented serious competition to stocks, the average price-to earnings ratio for the S&P 500 was 19 times.
Based on the estimated 2011 earnings, for the S&P 500 and a valuation multiple of 15, stocks have 13 percent upside, he said. Stocks could rise 43 percent if investors assume a P/E multiple of 19 times.
The quality of U.S. corporate earnings is strong, marked by fewer writeoffs and with reported earnings that are more in line with operating results, he said.
The best bet for investors is to buy high-yielding stocks -- AT&T Inc (T.N), Exxon Mobil Corp (XOM.N) and Chevron Corp (CVX.N), for example -- offering more income than bonds and available for relatively low prices. (Reporting by Joseph A. Giannone; editing by Andre Grenon)