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
Boosting BlackRock's Fair Value Estimate -- The Week in Dividends 2021-01-15
From the DividendInvestor news file this week:

Procter & Gamble PG and Starbucks SBUX both declared dividends this week that were unchanged from their previous respective payouts.

Please see new analyst notes and updates below from Morningstar Research Services for BlackRock BLK, Duke Energy DUK, Pfizer PFE, and Wells Fargo WFC.

And here are few dividend-related articles from Morningstar and elsewhere that caught my eye this week:

1. Michael Hodel, former portfolio manager for DividendInvestorhas five dividend picks for 2021. Four of them are current Dividend Select holdings.

2. Amy Arnott, a portfolio strategist for Morningstar, looks at dividend-stock funds.

3. In The Wall Street Journal, Meir Statman discusses "homemade" dividends versus regular company-paid dividends through a behavioral finance lens:

"Imagine that you received $1,000 as a company-paid dividend and used it to buy a TV set. Compare it to creating a $1,000 homemade dividend by selling shares to buy a TV, only to find that the price of shares zoomed soon after you sold them. The pain of regret is likely greater with homemade dividends because you bear responsibility for selling shares when you did, whereas you don't bear responsibility for the company paying dividends when it did."

Also from Morningstar: Aron Szapiro, head of policy research for Morningstar, put together "An Investor's Guide to the Biden Administration."

Best wishes,

David Harrell
Editor, Morningstar DividendInvestor

News and Research for Dividend Select Portfolio Holdings

BlackRock Closes 2020 With a Record $8.677 Trillion in AUM; Raising FVE to $750 per Share
by Greggory Warren, CFA | Morningstar Research Services LLC | 01-15-21

We've increased our fair value estimate for BlackRock to $750 per share from $620 to account for the continued recovery in the equity, credit and currency markets following the steep coronavirus-induced sell-off in the first quarter of 2020. More than half of the change comes from our expectation that BlackRock will have more in assets under management, or AUM, in 2021-25 than we were previously forecasting (as we adjust the timing and severity of near-term market corrections), given where they closed out 2020, with the remainder coming from a slightly better fee outlook, as well as more stability in their margins than we were previously forecasting. Our new fair value estimate implies a price/earnings multiple of 20.3 times our 2021 earnings estimate and 18.5 times our 2022 earnings estimate. For some perspective, during the past five (10) calendar years, the company's shares have traded at an average of 19.7 (18.4) times trailing earnings.

BlackRock closed out 2020 with a record $8.677 trillion in managed assets, reflective of a 16.8% gain year over year, with organic growth, market gains and favorable currency exchange all adding to the improvement in AUM. Net long-term inflows of $257.3 billion during 2020 translated into 3.7% organic long-term AUM growth (about midway between our expectations for 3%-5% annual organic growth for the firm's long-term assets on an ongoing basis). Our outlook for the next five years calls for average annual organic long-term AUM growth at a similar rate, with managed assets overall expanding at a mid- to high-single-digit rate on average annually. With fee compression expected to continue to be an issue for all market participants this should translate into a positive 5.7% CAGR for revenue during 2021-25. As for profitability, we expect the firm's margins to average 40%-41% on an adjusted basis (compared with 38%-39% during the past five calendar years).

Duke Energy Proposed Rate Settlement Highlights Florida's Constructiveness
by Andrew Bischof, CFA, CPA | Morningstar Research Services LLC | 01-15-21

We are reaffirming our $92 fair value estimate and stable, narrow moat ratings after Duke Energy subsidiary Duke Energy Florida, or DEF, filed a rate settlement with the Florida Public Service Commission. Key parties agreed to the settlement, subject to the commission's approval expected in the second quarter with new rates effective Jan. 1, 2022.

The proposed settlement for the company's 2021 rate case allows for rate stability through 2024, with base rate increases of $67 million, $49 million, and $79 million in 2022, 2023, and 2024. The company is allowed a 9.85% midpoint return on equity with a 100-basis-point return band. The financial conditions are consistent with our expectations, and we expect Duke will be able to earn in the upper half of its allowed return range. We expect the commission to approve the settlement with no material changes.

The proposed settlement highlights Florida's position as a leading regulatory environment for utilities. As part of the settlement, there is the potential for an adjustment to Duke's allowed return on equity if the 30-year Treasury yield increases 50 basis points over a six-month period, allowing Duke an additional 25 basis points of return and helping mitigate interest rate risk. Additionally, the proposal would provide regulatory clarity and revenue protection if the Biden administration implements tax reform. The settlement allows Duke to increase customer rates in line with any increase in tax rates.

Florida is an important growth area for Duke. We estimate DEF will grow rate base 7.5% annually. Only Duke's Piedmont subsidiary offers more growth. Like its peers in the state, Florida offers attractive renewable energy growth with $1 billion in shared solar program investments and an additional $1 billion for 700 MW of utility-scale solar. Storm hardening and investments supporting the state's population expansion are additional growth opportunities.

Coronavirus to Create $39 Billion Vaccine Market and $10 Billion Treatment Market in 2021
by Karen Andersen, CFA | Morningstar Research Services LLC | 01-12-21

Following a year with more than 83 million reported cases and 1.8 million reported deaths globally due to COVID-19, 2021 begins as two newly authorized vaccines are distributed to high-priority populations in the United States and Europe. These mRNA vaccines from Pfizer/BioNTech and Moderna have set a high bar for efficacy and safety, and they appear poised to ramp up supply and dominate the U.S. market throughout the first half of the year, supporting a foundation for herd immunity in the U.S. by midyear. With additional support from Johnson & Johnson, Novavax, AstraZeneca, and Chinese and Russian vaccine programs, global herd immunity looks achievable by 2023.

We expect $39 billion in COVID-19 vaccine sales in 2021, and we see Pfizer/BioNTech dominating the vaccine market with nearly $14 billion in 2021 sales. Although we remain skeptical of AstraZeneca's ability to penetrate the U.S. market due to mixed phase 3 data so far, we assume the U.S. will see sufficient supply from Pfizer/BioNTech, Moderna, Novavax (70% probability), and Johnson & Johnson (50% probability) to achieve herd immunity by mid-2021. We forecast over $10 billion in sales for newly authorized treatments in 2021, led by antibody treatments from Eli Lilly, Regeneron/Roche, and GlaxoSmithKline/Vir for mild/moderate patients and Merck's CD24Fc, Lilly's Olumiant, and Gilead's Veklury in hospitalized patients.

Several biopharma firms with COVID-19 treatments (Gilead, Roche, Glaxo, and Merck) look undervalued, based on strong potential for their core businesses. COVID-19 vaccine firms are generally fairly or overvalued, although AstraZeneca and Pfizer trade at slight discounts to our fair value estimates. We do not include postpandemic (post-2023) sales for vaccines or treatments because of uncertainty around future transmission and competition, which results in limited impact on our valuations.

Tough Q4 as Wells Fargo Reveals New 2021 Guidance; Long-Term Targets Reaffirm Our Overall Thesis
by Eric Compton, CFA | Morningstar Research Services LLC | 01-15-21

Wide-moat Wells Fargo reported OK fourth-quarter earnings per share of $0.64, roughly in line with FactSet consensus of $0.59. This equates to a return on tangible common equity of 8%. As expected, results weren't pretty, and there was a lot to digest, but overall, several important items were where we wanted them. Quarterly revenue was down 10% year over year, driven by a net interest income decline of 17%, while expenses were down 5%. One disappointment for us was NII, as additional mortgage-backed securities amortization and a declining loan book pushed NII lower than we expected in the quarter, and the guidance for 2021 was a bit lower than we were hoping. Management now expects NII declines of 0%-4% in 2021 compared with an annualized 2020 fourth-quarter run rate, implying a full-year decline of roughly 8%-11% in 2021. The asset cap is still hurting, as Wells can't expand its balance sheet to offset net interest margin pressure. The asset cap also ate into fees as trading income was down while peers were seeing growth.

Several other items of note were largely positive. The bank's updated expense disclosures gave a lot of new details, including a 2021 expense outlook and additional color on the overall expense-saving picture. Expenses are one of the key drivers of our thesis. Based on the updated data, it appears Wells should be where we expected in 2021, and it has a good shot at hitting our previous 2022 projections as well. Further, management highlighted a direct path in the short to medium term toward a sustainable return on tangible equity of 10% and a longer-term path toward 15%; the latter is slightly above where we previously projected the bank to normalize, and it was encouraging to see that our long-term estimates of Wells' profitability are generally supported by the latest updates. Because the longer-term items generally line up with our expectations, we don't plan to materially change our $45 fair value estimate.

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.

©2021 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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