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 of DividendInvestor's model dividend portfolios, the Dividend Harvest and the Dividend Builder. 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

The goal of the Builder Portfolio is to earn annual returns of 11% - 13% 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:

2% - 4% current yield
8% - 10% annual income growth

The goal of the Harvest 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:

6% - 8% current yield
2% - 4% annual income growth

 
About Josh Joshs Photo
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, and manager of DividendInvestor's model dividend portfolios, the Dividend Harvest and the Dividend Builder.
Featured Posts
Dividends and Stewardship -- This Week in Dividends 08-29-2014

At Morningstar, when we analyze management teams to determine a stewardship rating, one of the factors we consider is whether or not the company has the right dividend policy. Specifically, we want to know if the payout is appropriate given the firm's reinvestment needs and the cyclicality and capital intensity of its business.

A gold miner, for instance, will ideally have a low payout ratio since its year-to-year cash flows are highly unpredictable and largely driven by gold prices. Though commodity producers often have inappropriate dividend policies -- consider Vale VALE and Cliffs Natural Resources CLF, both of which cut their payouts in 2013 -- we have a positive view of Eldorado Gold's EGO dividend policy, which links its payout with gold prices and production. 

Conversely, regulated utilities like Southern Co. SO can usually afford higher payout ratios given the relative stability of their cash flows. Mature businesses in defensive industries like Procter & Gamble PG and Coca-Cola KO should also, all else equal, be able to pay out a larger percentage of free cash flow than more cyclical companies. If similarly situated firms are still retaining the bulk of their free cash flow, we see an increased risk for value-destructive "empire building."

Another situation in which a low payout ratio can be justified is if a company consistently has attractive reinvestment opportunities and management can do more with the capital than its shareholders would be able to on their own. This is exactly why most Berkshire Hathaway BRK.B shareholders are content with not receiving a dividend while Warren Buffett is running the show. Of course, the combination of plentiful reinvestment opportunities overseen by a master capital allocator like Buffett is rare, and most companies should return excess cash to shareholders.

The ideal dividend policy will vary by company, but we believe the common traits should be consistency, affordability, and transparency. As dividend-focused investors looking to steadily grow our income streams, it helps to know that the companies we're investing in are led by management teams and boards of directors that consistently strike the right balance between delivering dividends today and reinvesting for dividends tomorrow. 

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Late last week, we slightly increased our fair value estimate for Paychex PAYX to $37 per share from $36 due primarily to the time value of money. Our core thesis on the company hasn't changed and we reiterated our opinion that while lackluster client growth has impeded Paychex's growth in recent years, the situation has been improving modestly and we expect that trend to continue. We forecast improving margins as a result of higher float income and some modest scale benefits. 

Finally, please note that our fair value estimate for Rogers Communications RCI did not change last week to $44 per share, as was noted in last week's message. It has remained $44 per share since February. We apologize for the confusion.

Josh will be back next week. It's been fun keeping an eye on the DividendInvestor portfolios for the last two weeks. Have a great Labor Day Weekend!

Stay patient, stay focused. 

Best, 

Todd Wenning

Equity Analyst

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

Disclosure: I own the following MDI recommendations in my personal portfolio: KO, GSK, PG, UL, JNJ; I also own shares of BRK.B.

 
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