About the Editor

David Harrell 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.

David served in several senior research and product development roles and was part of the editorial team that created and launched Morningstar.com. He was the co-inventor of Morningstar's first investment advice software. David joined Morningstar in 1994. He holds a bachelor's degree in biology from Skidmore College and a master's degree in biology from the University of Illinois at Springfield.

Our Portfolio Manager

George Metrou is an equity portfolio manager for Mornigstar Investment Management. Metrou joined the team as a portfolio manager in August 2018. Before joining Morningstar Investment Management, he was an equity portfolio manager with Perritt Capital, and as a portoflio manager with Perritt Capital Management. Prior to that he served as Director of Research and as an equity analyst at Perritt Capital, and as a portfolio manager with Windgate Wealth Management. He holds a Bachelor's degree in finance form DePaul University, and 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 Editor's Photo
David Harrell
Editor, Morningstar DividendInvestor
David Harrell 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
Happy Thanksgiving -- The Week in Dividends 2020-11-25
From the DividendInvestor news file this week:

Genuine Parts
GPC declared a quarterly dividend of $0.79, unchanged from its previous rate.

Please see new analyst notes and updates below from Morningstar Research Services for Enbridge ENB, FirstEnergy FE, United Parcel Service UPS, and Ventas VTR. Several holdings were also tagged in a general note about President Trump's recent orders for U.S. drug pricing.

Best wishes,

David Harrell
Editor, Morningstar DividendInvestor


News and Research for Dividend Select Portfolio Holdings

Enbridge: Line 3 Receives Federal Water Permits; Two Permits Remain
by Joe Gemino, CPA | Morningstar Research Services LLC | 11-24-20

Wide-moat Enbridge received all the necessary federal permits from the U.S. Army Corps of Engineers, including the Section 404 water permit, on Nov. 23. With the federal permits secured, Enbridge still needs two additional permits before it can start construction. Enbridge previously applied to the Minnesota Pollution Control Agency for the construction stormwater permit and is waiting for the final permit. Now that Enbridge has received the federal water permits, it can apply to the Minnesota Public Utilities Commission for the final authorization to construct. We don't anticipate any difficulties in receiving the final construction permits based on the MPCA granting the stringent 401 permit and the MPUC voting to uphold Line 3's certificate of need multiple times. At this time, Enbridge is hopeful that it can receive the final two permits and start construction on the pipeline this year. We continue to expect construction to take six to nine months, and the end of 2021 still looks like an appropriate in-service date. We are maintaining our $43/CAD 56 fair value estimates, which include the probability that the pipeline is built and fully operational at 80% and that the pipeline is protected by its integrity replacement status at 20%.

Payment to Chairman of Ohio Commission Further Strains FirstEnergy's Regulatory Relationships
by Charles Fishman, CFA | Morningstar Research Services LLC | 11-20-20

We are lowering our fair value estimate to $43 per share from $44 after narrow-moat FirstEnergy filed its overdue 10-Q for the 2020 third quarter. The filing revealed a $4 million payment was made in early 2019 to terminate a consulting agreement that had been in place since 2013. The filing also stated that the counterparty of the consulting agreement later took a full-time role as an Ohio government official.

It became apparent that the government official was Sam Randazzo, chairman of the Ohio Public Utilities Commission, when he resigned the following day and following an FBI raid on his home the week before.

The reduction in our fair value estimate is due to our assumption that FirstEnergy will reduce planned investment in its Ohio distribution utilities from 2021-24 by approximately 30% below guidance. This would reduce our five-year estimated consolidated capital expenditures by roughly 5%, or $680 million, to about $14 billion. Lower Ohio investment reduces our average annual EPS growth in 2021-24 by 50 basis points, to 4.8%, modestly lower than FirstEnergy's 6%-8% target for 2021 and 5%-7% target in 2022-23.

Less capital investment in Ohio would reduce or eliminate any rate increase request when FirstEnergy's three Ohio utilities file for new base rates in 2023, effective in 2024. We believe this would help repair strained Ohio regulatory relationships. In addition, the lower capital expenditures would strengthen FirstEnergy's balance sheet and reduce the risk of credit agency downgrades.

We reiterate that Ohio distribution represents less than 20% of FirstEnergy's consolidated operating earnings. In our opinion, its other utility businesses remain solid and we continue to see strong growth at the company's Federal Energy Regulatory Commission-regulated interstate transmission, which we estimate will represent close to one third of earnings by 2024.

A Fair Value Increase for UPS
by Matthew Young, CFA | Morningstar Research Services LLC | 11-23-20

Upon revisiting our model assumptions, we are raising our fair value estimate for UPS to $123, from $121. The increase was mostly due to tweaking our operating margin assumptions modestly higher for the next several years to give UPS more credit for operating leverage from solid B2C volume gains.

In recent years, UPS' flagship parcel delivery operations have benefited from the surge in U.S. e-commerce trends (including rising demand for next-day air deliveries), new business wins from Amazon (now 11.5% of revenue), and new services catering to large and midsize e-commerce shippers. COVID-19 disruption and sluggish industrial end markets have hit UPS' commercial B2B shipment demand this year. However, B2C activity is seeing strong tailwinds from the spike in online fulfillment, and although this creates mix headwinds to margins, it's providing a nice offset to soft B2C activity. Additionally, B2B volumes are now posting sequential improvement off pandemic lows.

A Fair Value Increase for Ventas
by Kevin Brown, CFA | Morningstar Research Services LLC | 11-25-20

We are increasing our fair value estimate for Ventas to $57 per share from $55 per share after updating our model for third-quarter results and moderating the short-term impact of the coronavirus in our senior housing assumptions. Our fair value estimate implies a mid-5% cap rate on our forward four-quarter net operating income forecast, a 20-times multiple on our forward four-quarter funds from operations estimate, and 3.8% dividend yield, based on a $1.80 annualized payout.

The rent, occupancy and margin assumptions for each sector drive total company annual same-store NOI growth averaging 2.8% across our 10-year forecast. We expect continued acquisition and disposition activity as Ventas repositions its portfolio and improves the overall quality of its assets; we project $350 million-$450 million in acquisitions annually at an average cap rate of about 6.1% and $120 million of dispositions at 6.7% cap rates as the company looks to recycle lower-quality assets to partially fund the acquisition of higher-quality assets. We plan to incorporate significant announced external growth as they are announced. Additionally, we expect Ventas to invest roughly $360 million annually in new development and redevelopment projects at a 7.9% average yield.

Implementation of Trump's Recent Efforts to Affect Drug Pricing Seems Unlikely

by Damien Conover, CFA | Morningstar Research Services LLC | 11-23-20

President Donald Trump issued several orders on Nov. 20 designed to lower U.S. drug prices, but we don't expect implementation of the orders due to legal challenges, lack of support from the U.S. Congress and the new Biden administration, and unclear financial impacts. As a result, we don't expect any major impact on the U.S. pricing power of drugs, a core pillar of the moats and valuations in the drug industry.

One of the White House directives focused on pricing 50 of the largest Medicare B drugs (hospital-administered drugs) at the lowest levels paid by developed countries. While this would significantly affect U.S. prices, as we estimate drug pricing in the United States is close to double prices in developed markets, we expect valid industry legal challenges to stop this order. The order doesn't appear to have followed the normal legal process and instead was rushed out for Trump to enact the policy before leaving office. Additionally, we believe the rule is difficult to implement without legislative support from Congress. Further, we don't expect the Biden administration to focus initially on U.S. drug pricing, especially in the form of these recent proposals that lack full legal and congressional support.

A second White House directive targeted the elimination of pricing rebates in the U.S. drug system, an entrenched system that is very complex to undo through presidential order, especially without a clear analysis of financial implications. While we expect the drug industry to support the removal of rebates as drug firms only receive payments excluding rebates, we expect the payer groups will oppose the rule, given the importance of rebates in payer strategies. With a high degree of uncertainty regarding the impact on the federal budget, we expect the payer groups will be successful in stopping this effort to repeal drug price rebating.

Investment research is produced and issued by subsidiaries of Morningstar, Inc. including, but not limited to, Morningstar Research Services LLC, registered with and governed by the U.S. Securities and Exchange Commission. Analyst ratings are subjective in nature and should not be used as the sole basis for investment decisions. Analyst ratings are based on Morningstar’s analysts’ current expectations about future events and therefore involve unknown risks and uncertainties that may cause such expectations not to occur or to differ significantly from what was expected. Analyst ratings are not guarantees nor should they be viewed as an assessment of a stock's creditworthiness. Ratings, analysis, and other analyst thoughts are provided for informational purposes only; references to securities should not be considered an offer or solicitation to buy or sell the securities.

©2020 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. Morningstar’s analysts are employed by Morningstar, Inc. or its subsidiaries. In the United States, that subsidiary is Morningstar Research Services LLC, which is registered with and governed by the U.S. Securities and Exchange Commission.
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