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

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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
Results for Wells Fargo, A Board Seat for Trian -- The Week in Dividends 2017-10-13
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.

From the DividendInvestor news file this week:

Dominion Energy D and Enterprise Products Partners EPD both announced dividend raises. Dominion increased its quarterly payout from $0.755 to $0.77, a 2% increase, and Enterprise increased its quarterly distribution from $0.42 to $0.4225, a 0.6% increase. Coca-Cola KO, Realty Income O, and Procter & Gamble PG also declared dividends this week, all unchanged from their previous payouts.

In corporate board news, Ed Garden of Trian will be joining General Electric's GE board and it appears that, after a proxy battle, Trian's Nelson Peltz lost his bid for a seat on Procter & Gamble's board, though Peltz will likely contest the results. Morningstar analyst notes for both firms are below, along with new notes for Pfizer PFE and Wells Fargo WFC, a second note for GE that was too late for last week's update, and a general note on utilities.

Finally, this week also saw speculation about GE's dividend, with one analyst predicting a dividend cut, though CNBC subsequently reported that GE said its dividend remains a "top priority." At this point, we think patience is advised and we're waiting for the firm to provide more guidance at its upcoming Investor Update on Nov. 13.

Best wishes,

David Harrell
Managing Editor, Morningstar DividendInvestor

News and Research for Dividend Select Portfolio Holdings

Trian Takes Board Seat at General Electric; Aggressive Cost Cuts and Asset Sales Likely on Horizon
by Barbara Noverini | Morningstar Research Services LLC | 10-09-17

Following the management shakeup on Oct. 6, wide-moat GE announced that Ed Garden of Trian will immediately replace former Deere CEO Robert Lane on the board of directors. GE shares have underperformed the S&P 500 since Trian's disclosure of its $2.5 billion, or nearly 1%, stake in October 2015; however, Garden has often asserted that GE has a solid path toward improving industrial free cash flow, and we expect that Trian's board-level involvement will influence new CEO John Flannery to remain laser-focused on cost cuts.

Already, Flannery has hit the ground running, slashing expenses by grounding GE's fleet of corporate jets, slowing construction of GE's new corporate headquarters in Boston, combining the power and energy connections segments, and thinning the corporate ranks. We recognize that these are quick fixes meant to help GE meet its 2017-18 cash flow targets. However, Trian has repeatedly highlighted the long-term nature of its GE investment. As such, when Flannery reveals his vision for GE on Nov. 13, we expect to see a plan that quantifies how GE's recent investments (Alstom, Baker-Hughes, H-Class Turbine, and the Leap engine) will translate into stronger cash flow from industrial operations above and beyond the $2 billion in permanent cost reduction that former CEO Jeff Immelt and outgoing CFO Jeff Bornstein outlined earlier this year at Trian's urging.

Although Garden's involvement in Pentair's board influenced the May 2017 decision to split the company in two, we remain unconvinced that GE is headed down the same path. In a joint interview with GE management in October 2015, Trian's Nelson Peltz stated that "It's not something you want to break up," and we agree that GE's economies of scope remain critical to its success. Nevertheless, we expect to see more noncore asset sales on the horizon as businesses like lighting and transportation struggle to justify their ongoing inclusion in GE's portfolio.

Procter & Gamble Shareholders Have Their Say, Denying Peltz a Board Seat; Shares Fairly Valued
by Erin Lash, CFA | Morningstar Research Services LLC | 10-10-17

Concluding a nearly three-month proxy battle, Procter & Gamble shareholders have spoken -- preliminary votes from its annual meeting favor the company's slate of directors, putting to rest activist investor Nelson Peltz's bid for a board seat. However, all indications suggest the margin of victory was quite slim, and as such, we anticipate Peltz (who has taken issue with the firm's organizational structure, corporate governance, and recent financial performance) to contest the vote.

We haven't wavered from our stance that the addition of Peltz to the board would do little to accelerate the pace of change that is under way at the household and personal care firm. From our vantage point, it is already working to reduce complexity in its operations and appropriately refocusing its brand investments to more effectively align with evolving consumer trends, efforts that we expected would take time to yield material gains. In this vein, we surmise its decision to part ways with more than 100 brands over the past three years (which wrapped up in October 2016) evidences recognition it needs to be a more nimble and responsive operator in the highly competitive consumer product landscape. And as a result of these actions, we think it is poised to focus its financial and personnel resources on the highest-return brand and category opportunities, which should ultimately drive increasing sales and volume growth and aid the brand intangible asset source underlying its wide moat.

We don't intend to alter our $96 fair value estimate (based on 4% annual sales growth in the longer term and 300 basis points of operating margin expansion to nearly 25% at the end of our 10-year explicit forecast) as a result of this news. Despite a low-single-digit down tick, shares generally trade in line with our valuation, but in the event of a more material pullback in its share price on concerns surrounding the competitive landscape, we'd likely suggest investors consider building a position

Pfizer's Plans to Divest the Consumer Business Lead to No Major Impact on Valuation or Moat
by Damien Conover, CFA | Morningstar Research Services LLC | 10-10-17

Pfizer's announced plans to potentially divest the consumer healthcare segment don't change our fair value estimate or wide moat rating. We still view Pfizer as fairly valued with a strong competitive positioning within the branded drug segment. A shift away from consumer healthcare would reduce the brand power moat source for the firm, but with only 6% of sales derived from consumer healthcare products, the loss of branding power is not material for the company.

We estimate the value of Pfizer's consumer division at close to $17 billion based on recent comparable sales, which suggests a divestiture would create a minor level of valuation (low-single-digit percentage gain) for shareholders. Over the past three years, the price/sales multiples for major consumer healthcare divisions have ranged from 4 to 6 times, with Bayer's purchase of Merck's consumer healthcare group coming in at the high end of this range, while Sanofi's asset swap for Boehringer Ingelheim's consumer group was at the lower end of the range. If Pfizer were to pursue a sale of the consumer group, the tax implications would likely erase any valuation creation from the deal. However, a spin-off or split-off would likely create a minor level of value-creation for shareholders.

With no major Rx (prescription) to OTC (over-the-counter) switches likely over the near term, we view the synergy of holding the consumer health business with Pfizer's prescription business as less important. While cholesterol lowering drug Lipitor and erectile dysfunction drug Viagra hold potential for a Rx-to-OTC switch, we are skeptical the major regulatory agencies will approve the label change. Further, with Pfizer focusing more on critical-care areas such as oncology in its prescription business, future Rx-to-OTC switches seem less likely.

No Quick Fixes for Wells Fargo, but Valuation Remains Attractive
by Jim Sinegal | Morningstar Research Services LLC | 10-13-17

Wells Fargo's third quarter was a bit of a setback for the firm, especially compared with peers, as a drop in loan balances and a relative lack of leverage to rising interest rates took a toll on revenue. However, the company continued to add deposits, and deposit pricing rose just 15 basis points during the year. We see the continued growth of the bank's low-cost funding base as encouraging and believe the company's efforts to overhaul its sales practices will prove capable of reviving revenue growth over a reasonable time frame. Wells achieved a return on assets of just 0.94% during the quarter, its worst performance since the first quarter of 2010. We are maintaining our $67 fair value estimate.

Expenses were affected by a $1 billion mortgage-related litigation expense and a 19% year-over-year increase in spending on professional services, much of which was related to the company's fraudulent-account remediation effort. Otherwise, noninterest expenses, including salaries, experienced modest increases during the year. Occupancy expenses were flat, while employee-related costs rose less than 3%. We think a renewed focus on efficiency, combined with a healthy deposit base and solid credit quality, will provide the base for an eventual return to form. Management is targeting $4 billion in expense savings by 2019, and we think the success of cost-cutting efforts at more troubled peers over the past decade bodes well for Wells Fargo. The company closed 52 branches in the quarter, leaving 5,927 in total; we suspect a smaller footprint is inevitable as consumer preferences change. Branch and ATM usage is falling at Wells while digital transactions continue to grow.

Encouragingly, no credit issues appeared during the quarter. Net charge-offs totaled just 0.3% of loans -- we expect losses to run at least 50% higher over the long run -- and nonperforming assets fell by $2.7 billion over the last 12 months.

Change Is Afoot at General Electric as Three Long-Time Executives Announce Departures
by Barbara Noverini | Morningstar Research Services LLC | 10-06-17

GE's unexpected announcement of three executive departures on Friday suggests that new CEO John Flannery is wasting no time shaping the management team that will help him execute the strategic vision he will describe to investors on Nov. 13. Although we were not surprised that former CEO Jeff Immelt decided to step down as chairman earlier than intended, we did not anticipate CFO Jeff Bornstein's decision to leave by the end of the year. Bornstein had been named vice chairman at the same time Flannery succeeded Immelt as CEO, and we expected them to work together in evaluating GE's next steps. That said, Bornstein's 28 years at GE translate into valuable experience; we expect to see him land at a company where he could wield even greater influence. Jamie Miller, who will succeed Bornstein, has quickly risen the ranks after joining GE in 2008. She brings a mix of financial and technological leadership experience that will likely be helpful in managing GE's pursuit of its digital-industrial strategy.

We believe that the retirement announcements of 39-year and 27-year veterans John Rice and Beth Comstock suggest that Flannery is aggressively scrutinizing corporate costs, especially those springing from seemingly nebulous, centralized initiatives. Rice most recently managed GE's Global Growth Organization, which championed GE's efforts in emerging markets, while Comstock led strategy for fledgling growth ventures like Current. In our opinion, these efforts can be effectively handled by the business heads of each segment, who may be even closer to the specific opportunities within each sector.

While admittedly abrupt, opportunity often follows significant change, and we continue to believe that shares of wide-moat GE look undervalued. New CEO Flannery is quickly demonstrating a decisive management style. As such, we expect to see a clear plan of action result from his portfolio review, which appears to be quite sweeping in scope in these early days.

EPA's Proposed Repeal of Clean Power Plan Has Little Effect on Utility Growth Outlook
by Andrew Bischof, CFA, CPA | Morningstar Research Services LLC | 10-11-17

We are maintaining our fair value estimates, moat ratings, and moat trend ratings for all utilities after Environmental Protection Agency head Scott Pruitt announced plans to repeal the Clean Power Plan, promulgated in 2015. 

We don't expect this move to have any impact on the utilities sector. We forecast U.S. carbon emissions will fall 28% from 2005 levels by early next decade, based on renewable energy and natural gas generation displacing coal generation. Low natural gas prices and gas turbine efficiency improvements are forcing coal plant shutdowns and reduced run times. Additionally, most uneconomic coal plants retired before complying with the EPA's Mercury and Air Toxics Standards.

We continue to forecast U.S. renewable energy capacity will double during the next eight years based on state renewable energy portfolio standards and improving economics. We think the move to abandon the CPP could even embolden states to strengthen renewable energy standards, similar to moves made by politicians and corporations following the administration's announcement to withdraw from the Paris climate agreement. Corporate renewable energy purchases have also shown to be material source of renewable energy demand. We expect this to continue to grow as businesses realize the economic and public perception benefits.

Utilities operating in states with constructive regulation and environmental policy support could realize 7%-9% annual earnings and dividend growth the next three to five years. Best positioned are utilities like Dominion Energy, Duke Energy, American Electric Power, and CMS Energy, which are investing billions of dollars in new gas infrastructure and transmission infrastructure supporting renewable energy development. NextEra Energy and Xcel Energy should maintain their lead as the top U.S. renewable energy companies.

©2017 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.

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