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
Problems with Buybacks - The Week in Dividends, 2014-08-22

As Josh mentioned on Monday, I'm keeping an eye on DividendInvestor until Labor Day while Josh enjoys some much-deserved time out of the office. In addition to covering the paper and packaging sector for Morningstar, I also head up Morningstar's equity stewardship methodology. Like you, I'm also a dividend-focused investor -- as you can see at the bottom of this note, I own five of the stocks in the Builder and Harvest portfolios -- so it's a real pleasure to be here.

It's been a relatively quiet week for the portfolios, so before I jump into the handful of updates from the last seven days, I'd like to briefly share some thoughts about buybacks and dividends in today's market.

According to FactSet, 380 companies in the S&P 500 repurchased stock in the first quarter of 2014 -- the same level as the third quarter of 2007. As you might expect, the number of companies buying back stock hit a low in the second quarter of 2009. Further, S&P 500 companies spent $1.75 on buybacks for every $1 paid in dividends in the first quarter.

As students of investing, we know that to realize better returns than the market over long periods of time, we must do things differently than other investors. With just under 80% of S&P 500 companies buying back their stock in the first quarter, it stands to reason that the companies will, as a group, realize the market-rate of return with recent buybacks. This isn't a particularly compelling rate of return considering we can realize the market-rate of return on our own using low-cost index funds.

While there are certainly some management teams who have the right approach to buybacks, they are the exception and not the rule. Companies that pay meaningful dividends naturally reduce the size of management's sandbox and thus the risk of poor buyback strategies and empire building.

This is consistent with Robert Arnott and Clifford Asness's 2003 study, appropriately titled "Surprise! Higher Dividends = Higher Earnings Growth", which found that, contrary to popular opinion, firms with higher dividend payout ratios produced higher earnings growth than those with lower payout ratios. That's because, with less capital left over after the dividend is paid, management is forced to be more thoughtful about how it allocates the remaining cash.

Here's to hoping more company boards of directors and executives increase dividend payouts, though it might take a while. In the meantime, I think we're well served by owning firms that already get the picture.

News and Research for Harvest and Builder Portfolio Holdings

Starting with some good news in the Harvest Portfolio, on Thursday Altria MO announced that the board voted to boost the already-generous quarterly dividend by 8.3% to $0.52 per share -- a pace that's above our 6% five-year dividend growth forecast, so that's good news.

Also on Thursday, we maintained our $51 per share fair value estimate for GlaxoSmithKline GSK. Pricing pressure and increased competition in the respiratory area led us to reduce our forecasts for Advair, which has an amplified impact on earnings given Advair's high margins. However, this was offset by our outlook for cost-cutting efforts, which should support steady operating margins. Post the completion of the restructuring with Novartis (2015), we forecast average annual sales growth of 2% during the next decade, with new products offsetting patent losses. Further, growth in emerging markets should mitigate the patent losses in developed markets, as brand names are more important in emerging markets and give products a much longer life cycle. As Josh noted in this month's issue, Glaxo's payout ratio in the mid-80% range likely limits medium-term dividend growth potential.

Over in the Builder, the most notable move was a reduction in our fair value estimate for Rogers Communications RCI to $44 per share from $48. The primary reason for the valuation change was that Rogers paid more than double the amount we expected for 700-megahertz spectrum, which lowers our near-term outlook for free cash flow, dividends, and buybacks.

Late last week, Coca-Cola KO announced a new partnership with and investment in Monster Energy MNST, which we view as a positive move. However, the investment is too small to alter our $44 per share fair value estimate. General Electric GE reported second quarter earnings in line with our expectations and we maintained our $29 per share fair value estimate. The diversity of GE's industrial businesses helped stabilize overall growth as strength in the power and aviation businesses offset tepid demand in the U.S. health-care markets.

Stay patient, stay focused.

Best,

Todd Wenning

Equity Analyst

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


 
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