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
Raises for Philip Morris and Realty Income -- The Week in Dividends 2017-09-15
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:

The past week saw dividend hikes for two Dividend Select portfolio holdings. Philip Morris International PM raised its quarterly dividend from $1.04 to $1.07, a 2.9% increase that brings its forward yield to 3.7%, based on today's closing price. And Realty Income O upped its monthly payout from $0.2115 to $0.212, a 0.2% increase that brings its yield to 4.5%.

At a Goldman Sachs conference on Thursday, Verizon VZ CEO Lowell McAdam announced plans to cut $10 billion in spending over the next four years. McAdam also said the firm was no longer looking to acquire a cable company and that the spending cuts would help support Verizon's dividend.

In a video report, Sonia Vora, Morningstar's analyst for Coca-Cola KO, discussed the firm's dividend:

"We expect its dividend will average high single-digit growth over the next decade, which is comparable to its historical rate."

You can watch the video and read the transcript here.

Below is a new Morningstar analyst note for Dominion Energy D. In addition, the portfolios' utility holdings were all tagged in a general note about the sector's overall valuation and Wells Fargo WFC was tagged in a note about trends in the banking industry. Both notes are included below.

Best wishes,

David Harrell
Managing Editor, Morningstar DividendInvestor

News and Research for Dividend Select Portfolio Holdings

Market Ignoring Dominion Energy's Conservative Strategy Pivot
by Charles Fishman, CFA | Morningstar Research Services LLC | 09-12-17

Dominion Resources recently changed its name to Dominion Energy, but in our opinion, the market doesn't appreciate the conservative strategy pivot relying on wide-moat infrastructure investments, which has also transpired. The company exited oil and gas exploration and production in 2010 and is now less dependent on merchant generation, two businesses where earning a moat is difficult.

Dominion's wide-moat growth projects -- notably the Cove Point Liquefied Natural Gas facility and the Atlantic Coast Pipeline -- illustrate the new conservative strategy and should be in commercial operation later this year and late 2019, respectively. We expect wide-moat businesses to generate roughly half of Dominion's operating earnings by 2021 and we believe these businesses will earn a material spread over our estimate of the company's cost of capital through the next decade.

We think some are valuing wide-moat Dominion like a narrow-moat company. Our $85 fair value estimate is 9% above the current stock price and 7% above the median consensus price target. The market also underappreciates what we believe are near-certain 10% annual dividend increases and moatworthy growth opportunities driving high-single-digit EPS growth. We think the dividend yield and earnings growth have the potential to deliver low double-digit total annual returns for conservative investors for the foreseeable future.

Utilities' Valuations Reach Another Peak, but Yield Paradox Persists
by Travis Miller | Morningstar Research Services LLC | 09-14-17

U.S. utilities' valuations reached a 14-month high this week when the median price/fair value ratio hit 1.17 for the 40 U.S. utilities in Morningstar's coverage.

This is the highest median P/FV ratio for U.S. utilities since the all-time peak of 1.21 in July 2016. Other valuation metrics such as price/earnings (22) and price/book (2.1) for U.S. utilities also hit 2017 highs this week and are approaching peak levels from mid-2016. Morningstar's U.S. Utilities Sector Total Return Index also hit an all-time high, up 15% year to date including dividends. This outpaces the S&P 500 (up 13%) and all sectors except healthcare and technology year to date.

Even though utilities' valuations appear exceedingly rich on an absolute basis, the sector's yield paradox--as we call it--continues to give bullish signs. Impressive dividend growth has kept the sector's average yield near 3.5% even with the runup in utilities' stock prices. This is a historically attractive yield premium to market interest rates. During the past 30 years, utilities' average dividend yields have been in line with 10-year U.S. Treasury yields, which held near 2.1% this week. If this historical relationship holds, utilities could have another leg of upside. Alternatively, the sector shouldn't suffer much on an absolute basis if interest rates rise.

We are reaffirming our fair value estimates and moat and moat trend ratings for all the U.S. utilities we cover. Our top picks are utilities like Dominion Energy and Duke Energy, which have transparent, high-quality growth investment opportunities but trade at average sector multiples. They also include utilities facing risks that the market is overly discounting. These include Scana and Southern, which are facing new nuclear project cost overruns, and FirstEnergy, whose nonregulated FirstEnergy Solutions subsidiary faces bankruptcy.

Many Positive Trends within the Banking Industry, but Compelling Valuations Are Tough to Find
by Eric Compton | Morningstar Research Services LLC | 09-14-17

Many of the U.S. banks we cover presented at the Barclays Global Financial Services Conference over the past three days, giving updated takes on guidance and views on the industry and the U.S. economy. Overall, not much changed, with only slight adjustments to guidance levels. Despite many positive industry trends, we don't see many compelling valuations within the U.S. banking sector. Best idea Wells Fargo is the main standout, trading at a 23% discount to our fair value estimate, while many of our regionals, despite our assumption that a tax cut will take place, still trade at or even above our fair value estimates.

Several key themes emerged during the conference, including the consistency of low deposit betas, continued efforts to improve operating efficiency, increasing capital returns to shareholders, and marginally slower loan growth for the third quarter. The universal U.S. banks also mentioned a likely reduction in third-quarter trading revenue. We believe investors should not overreact to these short declines in loan growth or trading revenue. As for trading, volatility may have remained low over the summer, but we don't expect markets to remain calm forever. At the same time, a tight rein on expenses across the industry in recent years should pay off once volatility returns. For loan growth, once uncertainty abates surrounding key proposals in Washington, such as those related to tax reform, we believe commercial investment and mergers and acquisitions should pick up more.

Many of the banks were confident that low deposit betas would continue to hold, and even with slower loan growth, margins should remain steady to up. We believe that low betas cannot stay forever. Eventually competition will have to pick up. As a result, we forecast that betas will begin increasing in 2018, and net interest margin expansion will begin to slow somewhat, but will still occur amid slow but steady rate increases over the next several years.

While some of the banks will be affected by the destruction from the hurricanes in the Southeast, there was not much specific guidance around the effects of these storms, although all affected banks commented that any costs should be manageable, and many losses will be covered by insurance.

Many of the banks remarked that they will also continue closing branches and investing in digital initiatives, leaving room for banks to keep improving operating efficiency over the medium term. We project nearly all banks under our coverage improving their cost/income ratios over the next several years as this trend plays out.

Finally, the push towards lower common equity Tier 1 ratios also remains a key theme, as banks attempt to more efficiently use their capital, improve returns on tangible equity, and return excess capital to shareholders following excellent CCAR results. As an example, we expect undervalued Citigroup to return 10% of its current market capitalization to shareholders in the form of dividends and repurchases over the next 12 months, with dividends likely to account for a larger share of that total over time. This more efficient capital base will be another key item helping U.S. banks to improve returns on equity over the medium term.

©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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