About the Editor
Equities strategist Josh Peters is the editor of Morningstar DividendInvestor, a monthly newsletter that provides quality recommendations for current income and income growth from stocks.

Josh manages DividendInvestor's model dividend portfolio, the Dividend Select Portfolio. Josh joined Morningstar in 2000 as an automotive and industrial stock analyst. After leaving in 2003 to join UBS Investment Bank as an equity research associate, he returned to Morningstar in 2004 to develop DividendInvestor.

Peters holds a BA in economics and history from the University of Minnesota Duluth and is a CFA charterholder. He is also the author of a book, The Ultimate Dividend Playbook, which was released by John Wiley & Sons in January 2008.

 
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 Portfolio is to earn annual returns of 9% - 11% 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
5% - 7% annual income growth

 
 
Jun 03, 2015
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Josh Peters, CFA
Equities Strategist and Editor
Equities strategist Josh Peters is the editor of Morningstar DividendInvestor, a monthly newsletter that provides quality recommendations for current income and income growth from stocks.Josh manages DividendInvestor's model dividend portfolio, the Dividend Select Portfolio.
Featured Posts
The Risks of Reaching for Ultra-High Yields -- This Week in Dividends 05-29-2015

Hello again, fellow dividend investors! This is Todd Wenning, equity analyst on the basic materials team. As some of you may recall, I kept an eye on DividendInvestor last August while Josh was on vacation and I'm doing the same this week. Josh will be back next week.

One of my first dividend-focused investments was in a small-cap real estate investment trust called Education Realty Trust EDR, which specializes in collegiate student housing. Being only a few years out of college myself at the time (in the spring of 2006), I thought this was a business I could understand and figured that demand for college was only growing. Moreover, Education Realty Trust traded with a high trailing yield near 8% when the S&P 500 average was less than 2%.

"As long as the dividend holds steady," I naively thought, "I'm going to get at least 8% annual returns." (Hey, this investing stuff is easy!) After making the investment, everything went as planned for a quarter or two, until growth in Education Realty Trust's funds from operations (FFO) stalled. Adjusted FFO, which deducts maintenance capital expenditures from FFO, no longer covered the dividend and the company lowered its payout by 31%. To add insult, the stock price also declined on this disappointing news.

Fortunately, I sold my position before things got really bad for Education Realty Trust during the financial crisis years, but this mistake was nevertheless a valuable early lesson in the risks of reaching for ultra-high dividend yields. Put simply, yields that seem too good to be true usually are.

In 2013, Societe Generale published research that compared forward-looking dividend yields with the yields actually realized. They found that as forecasted yields crept above 7%, the difference between forecasted and realized yields increased substantially. Stocks with forecasted yields in the 4-5% range, for example, realized yields only slightly below expectations, while stocks with forecasted yields in the 10-15% range realized less than half of their expected yield, on average.

It's important to remember that ultra-high yields are rarely, if ever, a product of dividend growth. Rather, they usually result from a poorly performing stock price, which implies a depressed outlook for the underlying business. Unless you're confident that the market is missing something important and that a turnaround is close at hand, it's best to steer clear of such situations, tempting though they may be.

Instead, I think we'll find much more success focusing on businesses like the ones Josh has selected here at DividendInvestor -- companies with economic moats, healthy balance sheets, good management teams, attractive long-term growth potential, and the right dividend policy. What quality dividend- paying companies may lack in short-term yield, they make up for in dividend safety and growth prospects.


News and Research for Dividend Select Portfolio Holdings

There was some good news for the portfolio this week. On Tuesday, following a refinement of our bank economic moat methodology, Morningstar increased Wells Fargo's WFC moat rating to wide from narrow. Moreover, we increased our fair value estimate to $61 per share from $58.

Here's what Morningstar analyst Jim Sinegal had to say about Wells Fargo's moat rating in his updated report:

"We are upgrading our moat rating for Wells Fargo to wide from narrow on the basis of several factors that have increased our confidence in the bank's ability to generate excess returns over time...Wells Fargo's competitive advantage stems from cost advantages and customer switching costs in its core banking operations--which provide a vast majority of profits--and switching costs and intangible assets in wealth management. Wells Fargo's funding costs are its key source of advantage. The company has over $1 trillion in low-cost core deposits that provide virtually free funding, costing it only 9 basis points in the first quarter."

Stay patient, stay focused.

Best,

Todd Wenning, CFA

Equity Analyst

@toddwenning on Twitter ; todd.wenning@morningstar.com

Disclosure: I own the following MDI recommendations in my personal portfolio: JNJ, PG

 

 
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