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

 
About Josh Joshs Photo
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
A Healthcare Bill from the Senate -- The Week in Dividends 2017-06-23

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:

Pfizer PFE declared a quarterly dividend of $0.32 a share this week. As expected, this amount was unchanged from the previous quarter's payout.

In the new July issue of DividendInvestor, portfolio manager Michael Hodel addressed General Electric's GE dividend in his Portfolio Roundup section:

"I don't believe GE is currently at risk of cutting its dividend. The firm has indicated that the dividend is a very high priority and it would cease planned share repurchases well in advance of jeopardizing the payout."

On Wednesday, Barbara Noverini, who covers GE for Morningstar Research Services LLC, posted a video on Morningstar.com with her take on GE's dividend. She also believes a cut is unlikely.

Several Dividend Select portfolio holdings were tagged in general Morningstar analyst notes about the U.S. Senate's healthcare bill, interest rates and banks, and bank stress tests. These notes are included below.

Finally, when first posted, the PDF of the July issue contained some outdated information within the "Payouts in Peril" section on Page 19. If your downloaded copy includes Williams Partners WPZ in that section, please download an updated version here: http://mdi.morningstar.com/Newsletter.aspx

Best wishes,

David Harrell
Managing Editor, Morningstar DividendInvestor


News and Research for Dividend Select Portfolio Holdings

Senate's Healthcare Bill Shares Great Similarity With the AHCA, but Passage Is Still Uncertain
by Debbie S. Wang | Morningstar Research Services LLC | 06-22-17

While there are challenges to translating the Senate's healthcare bill into law, if successful, we think it would be largely positive for pharmaceutical and devices firms while having a mixed impact on hospitals and managed care firms.

After taking great pains to keep their healthcare proposals under wraps to bypass the normal committee consideration process and limit floor debate, Senate Republicans finally revealed their bill on June 22. Despite earlier comments by some senators that their bill would be substantially different from the House's American Health Care Act, the Senate's bill actually shares many similarities, including elimination of all mandates, high-risk pools, wider community rating bands, the option for states to redefine essential benefits, and a move toward capping Medicaid spending.

Considering the overlap between the House and Senate bills, we would be surprised if the Congressional Budget Office's anticipated scoring is significantly different from that of the House's AHCA, which is projected to result in 23 million Americans losing healthcare coverage over a 10-year period. The question remains whether grassroots outcry can gain enough steam before the vote, which is expected to be held next week.

On one hand, the similarities between the House and Senate bills make it more likely that the two bodies can work out their differences if the Senate votes in favor of its bill. On the other, there are considerable challenges to securing that vote in the Senate. The Republicans must thread a very fine needle in the Senate, given its control of 52 seats and the vice president's tie-breaking vote. In particular, senators from states that have expanded Medicaid face difficult choices, because those governors generally oppose capping Medicaid, despite a more gradual transition. The Senate's effort to maintain coverage for pre-existing conditions is generally rendered meaningless because of the large loophole for states to redefine benefits.

We Prefer Banks With Individual Issues to Rate-Sensitive Names
by Jim Sinegal | Morningstar Research Services LLC | 06-23-17

We believe the time is right for investors to rotate away from rate-sensitive banks into the stocks of companies that depend less on slow macroeconomic changes and more on factors under their own control. We believe Wells Fargo will eventually benefit from both lower expenses and -- perhaps surprisingly -- more effective sales practices as a result of more thoughtful incentive programs. We think capital return at Citigroup will improve returns on equity. As the U.S. economy strengthens, concerns over potential credit losses at Capital One should be assuaged as solid underwriting manifests in results.

Valuation is our main concern for the most rate-sensitive banks. Our fair value estimates depend primarily on long-term yield curve expectations -- we expect the 10-year Treasury rate to reach 4.5% over the next five years, with a commensurate increase in short-term rates. Many regional banks, including Comerica, M&T Bank, and Regions Financial, are now valued at levels that are difficult to support even as we incorporate much higher long-term rate expectations.

Our shorter-term rate outlook is another cause for concern. Our interest-rate thesis rests on slow-changing demographic, borrowing, and technological trends. We believe evidence of a turning tide will show up first in the housing market. Aging millennials should soon boost household formation, demand for labor is growing along with construction activity, and mortgage credit supply seems finally set to increase in a less stringent regulatory environment. Over time, these factors should increase both economic growth and interest rates, but we don’t expect dramatic change in the next 12 months. In fact, long-term rates have actually fallen year to date, potentially indicating that the bond market shares our somewhat more pessimistic view. Low inflation also supports our view that current interest-rate policy is not excessively accommodating, and as a result, there is no rush to tighten it.

2017 Stress Test Results Affirm Bank Capital Strength and Capital Return Plans Should Come Next Week
by Michael Wong, CFA, CPA | Morningstar Research Services LLC | 06-22-17

The Fed released the 2017 results from the supervisory stress tests conducted as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The tests serve to inform regulators, financial markets, and the general public how institutions' capital would withstand a hypothetical set of adverse economic conditions. All 34 of the banks subject to the stress test performed well on the most commonly watched measure, the common equity Tier 1 capital ratio, with even the two lowest performing banks -- Ally Financial and KeyCorp -- being 2-percentage points or more above the 4.5% regulatory minimum. These solid results are not all that surprising given that banks have been adding capital -- over $750 billion since 2009 -- to strengthen their balance sheets.

The Fed used two scenarios, adverse and severely adverse, as part of its stress tests. Highlights of the severely adverse scenario include a severe global recession with U.S. GDP declining about 6.5%, the U.S. unemployment rate rising to 10%, equity prices falling 50%, and commercial real estate prices falling 35%. Cumulatively, the stress tests under the severely adverse scenario projected loan losses of $383 billion over the nine-quarter planning horizon, with total losses of $493 billion when including other losses, such as trading and counterparty losses. The total losses of $493 billion were less than the $526 billion calculated for last year's stress tests due primarily to changes in balance sheets and risk characteristics. On average, the aggregate common equity Tier 1 capital ratio would decrease to 9.2% from 12.5% in the fourth quarter of 2016 in the severely adverse scenario.

©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.

Disclosure:
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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