About the Editor

Michael Hodel is the editor of Morningstar DividendInvestor, a monthly newsletter that focuses on dividend income investment strategy. For illustration purposes, issues highlight activities pertaining to a Morningstar, Inc. portfolio invested in accordance with a current income and income growth from stocks strategy.

Michael is portfolio manager for Morningstar Investment Management LLC, a federally registered investment adviser and a wholly-owned subsidiary of Morningstar,Inc. At Morningstar, Mike was a technology strategist for Morningstar, responsible for telecommunications research. He also served as chair of Morningstar's Economic Moat Committee, a group of senior members of the equity research team responsible for reviewing all Economic Moat and Moat Trend ratings issued by Morningstar. He joined Morningstar in 1998.

Hodel holds a bachelor's degree in finance, with highest honors, from the University of Illinois at Urbana-Champaign and a master's degree in business administration from the University of Chicago Booth School of Business. He also holds the Chartered Financial Analyst® designation.

Investment Strategy

Dividends are for everyone regardless of age. The outcome of owning dividend-yielding stocks is the key variable-higher-yielding stocks with safe payouts being less risky while affording investors who don't need current income the ability to reinvest/reallocate the capital.

The goal of the Dividend Select Portfolios is to earn annual returns of 8% - 10% over any three-to-five year rolling time horizon. We further seek to minimize risk, as defined by the probability of a permanent loss of capital. For our portfolio as a whole, this goal is composed of:

3% - 5% current yield
4% - 6% annual income growth

About Josh Joshs Photo
Michael Hodel, CFA
Editor, Morningstar DividendInvestor
Portfolio Manager, Dividend Select Portfolios
Michael Hodel is the editor of Morningstar DividendInvestor, a monthly newsletter that focuses on dividend income investment strategy. For illustration purposes, issues highlight activities pertaining to a Morningstar, Inc. portfolio invested in accordance with a current income and income growth from stocks strategy.
Featured Posts
Dividend Hikes for Realty Income and Fastenal -- The Week in Dividends, 2017-01-20

DividendInvestorâ„  focuses on the activities of portfolios of Morningstar, Inc. that are invested in accordance with the Dividend Select strategy. These portfolios are managed by Morningstar Investment Management LLC, a registered investment adviser, who manages other client portfolios using these strategies.

In case you missed the alert from earlier in the day, the February 2017 issue of DividendInvestor is now available for download here:


Please note: If you downloaded the issue prior to 4:00 pm Central Time, please download it again. The first version contained errors in the "Top Sectors" section on page 3. (The data was correct, but some wrong sectors were listed among the top 5.) The current version corrects the error--we apologize for the mistake.

There were two dividend increases this week for holdings of Morningstar's Dividend Select portfolios: On Tuesday, Realty Incomedeclared a monthly dividend of $0.2105, payable on 2/15/2017. That amount represents a 4% increase from the previous monthly payout. For context, Realty Income raised its monthly dividend six times in 2016 and five times in 2015. Fastenal FAST also increased its quarterly dividend on Tuesday to 32 cents a share. That's a 6.7% increase and brings Fastenal's forward yield up to 2.5% as of today's close.

In other portfolio-related news, both General Electric GE and Procter & Gamble PG announced quarterly results today. Quarterly earnings dropped for GE while P&G had a two percent increase in organic sales. Last week, Ventas VTR announced that it expects to achieve per-share normalized funds from operations (FFO) for the full year of 2016 on the high end of its guidance range of $4.10 to $4.13. (FFO is generally considered the best metric of a REIT's ongoing dividend-paying capacity.)

And a number of earnings announcements are coming up over the next few weeks for Dividend Select holdings: Altria MO will announce its fourth quarter results for 2016 on Wednesday, February 1. Also on that day, AmeriGas Partners APU will announce its first quarter results for 2017. The following week, Emerson Electric EMR will announce its first quarter results on February 7, and Compass Minerals CMP will release its fourth quarter results on February 8.

New Morningstar analyst notes for Fastenal, Procter & Gamble, and Wells Fargo WFC are below.

Best wishes,

David Harrell
Managing Editor, Morningstar DividendInvestor

News and Research for Dividend Select Portfolio Holdings

P&G Continues to Chalk Up Modest Sales Gains in Second Quarter
by Erin Lash, CFA | 01-20-17

The major headline from Procter & Gamble's second-quarter results was again the top-line improvement, as organic sales rose 2%, entirely reflecting higher volumes. This was even more impressive since it came on top of 2% underlying sales growth last year. In light of recent performance, management edged up its full-year organic sales outlook, now calling for 2%-3% growth from 2% previously. We've long maintained that focusing its resources (personnel and financial) on the highest-return opportunities should position P&G for accelerating sales, and recent results provide credence to our stance.

The firm isn't looking merely to drive unsustainable sales gains, but is working to root out inefficiencies, targeting to extract another $10 billion of costs by reducing overhead, lowering material costs, and increasing manufacturing and marketing productivity. And in that vein, adjusted gross margins ticked up 70 basis points to 51.5%, but adjusted operating margins held constant at 23.5%, as P&G has opted to reinvest in its brands and further entrench its business with retailers, supporting its intangible asset moat source. Partly as a result of its efforts to eliminate costs, we forecast gross margins will expand by around 200 basis points over the next 10 years to 51%, about 200 basis points above its average gross margin over the past five years. However, we also expect P&G will allocate 3% of sales for research and development and 11.5% of sales for marketing annually, up from historical levels of less than 3% and around 11%, respectively.

We don't expect to alter our $92 fair value estimate, and haven't wavered on our long-term discounted cash flow expectations--annual top-line growth about 4% over the next 10 years and 24%-plus operating margins (from 21% in 2016). Following a mid-single-digit rise in the shares, the discount relative to our valuation is contracting. However, we still suggest investors interested in the space keep an eye on this wide-moat name.

Fastenal Sees Early Signs of Optimism After a Tough Year
by Brian Bernard, CFA, CPA | 01-18-17

Fastenal finished its fiscal 2016 on a positive note, growing both sales and earnings by just under 3% over last year's fourth quarter. Although the wide-moat company's end markets remained relatively weak in 2016, management noted that optimism within process industries has improved; however, that optimism has yet to translate into improved financial results. We reiterate our $41 per share fair value estimate amid unchanged long-term growth projections. While we expect Fastenal to generate strong top-line growth as its end markets improve in the coming years, we think the company's shares are fully valued at current levels.

Although Fastenal's daily sales during the fourth quarter increased about 3% year over year to just over $15 million per day, we think much of this improvement can be attributed to an easy prior-year comparison. The company's nonfasteners segment grew about 6%, more than offsetting the nearly 2.5% decline in the company's fasteners sales. These sales results are indicative of much stronger maintenance-related sales relative to industrial production sales. Despite a continued mix shift to lower-margin large national account customers and nonfastener products, Fastenal's fourth-quarter gross margin (49.8%) and operating margin (19.3%) were about in line with the prior year as the company was able to offset unfavorable mix shift with lower headcount.

Fastenal's balance sheet and cash flow generation remain strong. The company's net debt balance of $277 million represents about 0.3 times our 2017 EBITDA estimate, and the company generated $514 million of operating cash flow in 2016, which equates to a 103% operating cash flow conversion ratio. The company declared a 7% increase in its quarterly dividend to $0.32 per share ($1.28 annually), which represents about a 2.5% dividend yield at current prices. We think the increased dividend is prudent given the company's strong financial footing.

Citigroup and Wells Fargo Remain Undervalued Post-Earnings
by Jim Sinegal | 01-18-17

Fourth-quarter bank earnings supported our view that Citigroup remains the most attractive of the large U.S. banks. We believe that the company has a clear path to higher returns on equity as it returns excess capital ($14 billion supporting legacy assets alone) and continues to reduce expenses (10% of the expense base is related to Citi Holdings and restructuring efforts). Yet, the bank trades at a 10% discount to tangible book value per share while competitor Bank of America trades at a 33% premium despite only marginally higher profitability.

We see Wells Fargo as a close second, with the highest dividend yield (2.8%) among the large banks. Growing deposit balances and a stable level of account closings provide evidence that the account sales scandal will not have long-lasting effects on profitability. We expect the advantages created by the bank's base of low-cost deposits to grow as interest rates rise and believe that aligning employee incentives with customer interests will benefit the bank in the long run.

We see Bank of America and JPMorgan as fully valued. Each trades at approximately 13 times forward earnings and at significant premiums to our $22 and $72 respective fair value estimates. We believe market optimism is somewhat overdone with respect to the benefits from interest rate movements and regulatory changes. The underlying economic reasons for low rates--demographic changes, the effects of technology on employment, and the state of the leverage cycle--have not changed dramatically in the past quarter. Furthermore, JPMorgan CEO Jamie Dimon confirmed our view that many of the benefits from changes to tax rates and other industrywide constraints will largely accrue to customers and employees rather than shareholders due to the highly competitive nature of the banking business.

©2016 Morningstar, Inc. All rights reserved. The Morningstar name and logo are registered marks of Morningstar, Inc. The information contained in this document is the proprietary material of Morningstar, Inc. Reproduction, transcription, or other use, by any means, in whole or in part, without the prior written consent of Morningstar, Inc., is prohibited. All data presented is based on the most recent information available to Morningstar, Inc. as of the release date and may or may not be an accurate reflection of current data.  There is no assurance that the data will remain the same.

The commentary, analysis, references to, and performance information contained within Morningstar® DividendInvestorâ„ , except where explicitly noted, reflects that of portfolios owned by Morningstar, Inc. that are invested in accordance with the Dividend Select strategy managed by Morningstar Investment Management LLC, a registered investment adviser and subsidiary of Morningstar, Inc.  References to “Morningstar” refer to Morningstar, Inc. 

Opinions expressed are as of the current date and are subject to change without notice. Morningstar, Inc. and Morningstar Investment Management LLC shall not be responsible for any trading decisions, damages, or other losses resulting from, or related to, the information, data, analyses or opinions or their use.  This commentary is for informational purposes only and has not been tailored to suit any individual. 

The information, data, analyses, and opinions presented herein do not constitute investment advice, are provided as of the date written, are provided solely for informational purposes and therefore are not an offer to buy or sell a security. Please note that references to specific securities or other investment options within this piece should not be considered an offer (as defined by the Securities and Exchange Act) to purchase or sell that specific investment.

This commentary contains certain forward-looking statements. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results to differ materially and/or substantially from any future results, performance or achievements expressed or implied by those projected in the forward-looking statements for any reason.   

Investments in securities are subject to investment risk, including possible loss of principal.  Prices of securities may fluctuate from time to time and may even become valueless.  Securities in this report are not FDIC-insured, may lose value, and are not guaranteed by a bank or other financial institution. Before making any investment decision, investors should read and consider all the relevant investment product information.  Investors should seriously consider if the investment is suitable for them by referencing their own financial position, investment objectives, and risk profile before making any investment decision. There can be no assurance that any financial strategy will be successful.

Common stocks are typically subject to greater fluctuations in market value than other asset classes as a result of factors such as a company's business performance, investor perceptions, stock market trends and general economic conditions.  

All Morningstar Stock Analyst Notes were published by Morningstar, Inc. The Week in Dividends contains all Analyst Notes that relate to holdings in Morningstar, Inc.'s Dividend Select Portfolio.

David Harrell may own stocks from the Dividend Select and Dividend Select Deferred portfolios in his personal accounts.

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