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
A Raise for Enterprise -- The Week in Dividends 2018-07-13
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:

Enterprise Products Partners EPD declared a quarterly distribution of $0.43, a 0.6% increase from the previous quarterly rate of $0.4275. Procter & Gamble PG also declared a quarterly dividend this week, unchanged from its previous quarterly payout.

Please see new analyst notes below from Morningstar Research Services for BT Group BT and Wells Fargo WFC. Comcast CMCSA tagged in three separate notes, which are also included below. 

Best wishes,

David Harrell
Managing Editor, Morningstar DividendInvestor

News and Research for Dividend Select Portfolio Holdings

Upgrading BT Group's Moat Trend to Stable; FVE Unchanged; Shares Remain Undervalued
by Allan C. Nichols, CFA | Morningstar Research Services LLC | 07-10-18

We are maintaining BT Group's narrow moat rating and upgrading its moat trend to stable from negative. Our fair value estimate remains unchanged. We think the acquisition of EE has strengthened BT's moat due to it being the only operator that owns both fixed-line and wireless telephone networks. As the owner of both networks, it controls the upgrade schedule, so it knows what areas will first be built out with new services, whether that is fiber-to-the-home (FTTH), G.fast, or 5G. It can target first the most competitive locations. It also has full control of marketing, billing, and the ability to cross-sell other services. Other countries that are further along in convergence have seen dramatic declines in churn. We anticipate BT will also reduce churn, which enhances the lifetime value of a customer and allows the operator to reduce marketing and retention spending. As the only operator in the country that owns both networks, we believe BT's moat is strengthened.

Our negative trend was primarily due to problems at BT's global services division. However, the acquisition of EE and continued declines at the global services division have reduced its impact. This division's revenue has declined from about 40% of external sales in fiscal 2009 to about 21% in fiscal 2018. It hasn't earned a respectable return on invested capital for some time, and we don't expect it to during the next couple of years, either, but it has intentionally lost a lot of low margin revenue. We anticipate revenue and margins to become more stable and ROICs to slowly improve.

While BT has gained broadband share for the past several years, CityFibre has built out a fiber network in a few cities and has signed an agreement with Vodafone to pass 1 million homes with FTTH by 2021 with an option to go to 5 million homes by 2025. This new network could reverse BT's broadband subscriber growth trend. However, we are skeptical that CityFibre can generate a fair return on capital with this business.

Wells Fargo Still Looking to Regain Its Footing, Better Days Likely in the Future

by Eric Compton | Morningstar Research Services LLC | 07-13-18

Wide-moat Wells Fargo's second quarter results were not the best, as net income per diluted share was down almost 9% year over year, largely due to weak noninterest income and increasing noninterest expenses. There were losses of $619 million during the quarter due to a multitude of factors, including $171 million related to the foreign exchange business and $114 million related to fee calculations in fiduciary and custody accounts. This was better than last quarter's operating losses of nearly $1.5 billion and over $3.5 billion in the fourth quarter of 2017. While the bank is headed in the right direction, it isn't quite out of the woods yet. There was another lawsuit filed against the bank in late June regarding its financing practices with merchants. Needless to say, the bank is still sorting through a number of issues.

This has all led to some pessimism surrounding Wells Fargo, something that is rare in the banking industry today. While current results are not the best, the bank still managed to generate a 10.6% return on equity during the quarter and a 12.6% return on tangible common equity. This is still well within the range of our current 2018 estimates, and we aren't currently projecting any substantial growth in revenue or expansion in return on equity through the end of 2019. Despite these conservative estimates, the bank is still roughly 15% undervalued compared with our fair value estimate of $65, which we are maintaining. If the company is able to meet its cost-cutting goals by 2020, both efficiency and returns on capital should improve significantly, which would easily justify our fair value estimate of $65 (just under 2.1 times tangible book value). Wells Fargo's dividend yield of around 3% adds to the stock's attractiveness, and the bank's sizable excess capital amounts should encourage even more capital returns from the bank. All of these factors should support the stock's value over the medium term.

The DOJ Files an Appeal to Reverse AT&T's Acquisition of Time Warner; AT&T's Shares Undervalued
by Allan C. Nichols, CFA | Morningstar Research Services LLC | 07-13-18

In a surprise move, the Department of Justice has filed an appeal against Judge Leon's ruling to allow AT&T to acquire Time Warner (now known as WarnerMedia). When the merger was approved, AT&T agreed to keep WarnerMedia separate while the DOJ decided to appeal in order to avoid the DOJ filing for a stay that would have prevented the merger. The DOJ had 60 days to appeal, but when it didn't within the first week, we assumed it wouldn't. Judge Leon's ruling was very thorough, and we think it will be difficult to reverse on appeal. While we haven't been big fans of the deal from the start as we think it is an expensive way for AT&T to gain content that could have been made available from purchasing rights to WarnerMedia's content rather than buying the whole company, we think an appeal is a waste of taxpayers' dollars. The appeal could also dampen other mergers and favor Disney in its attempt to buy Fox over Comcast, as Disney's offer has already received DOJ approval and Comcast didn't make a bid until after Judge Leon's ruling in favor of AT&T. For now, we are maintaining our fair value estimates of $40 per share for AT&T, $46 for Fox, $130 for Disney, and $42 for Comcast. We are also maintaining our narrow moat rating for AT&T and wide moat ratings for the others.

U.K. Regulator Approves Fox's Offer for Sky, but Comcast Tops Fox With GBX 1,475 Offer
by Allan C. Nichols, CFA |Morningstar Research Services LLC | 07-12-18

On July 12, Jeremy Wright, the new U.K. culture secretary, approved Twenty-First Century Fox's offer for Sky, removing the last barrier to taking the bid to a vote. However, Comcast threw a spanner into the works by increasing its bid for Sky to GBX 1,475 per share from GBX 1,250. Comcast reserves the right to reduce its offer by any amount up to the final dividend of roughly GBX 22 per share if the dividend is paid before a deal is closed. We are increasing our fair value estimate for Sky to GBX 1,453 per share, which is equal to Comcast's offer minus the dividend, which we already include in our model. We are keeping our narrow moat rating intact.

The market continues to expect a bidding war, pushing Sky's stock price higher. While this is certainly a possibility, we think Fox only needs to make an offer similar to Comcast's in order to win, as it already controls over 39% of the vote. At this point, we don't believe the higher prices being offered affect our fair value estimates of $42 per share for Comcast, $46 per share for Fox, or $130 per share for Walt Disney (which has bid for some Fox assets, including Sky). We are also maintaining our wide moat ratings on Comcast, Fox, and Disney.

Fox Raises Its Offer for Sky to GBX 1400; We Are Increasing Our Fair Value Estimate to GBX 1378
by Allan C. Nichols, CFA |Morningstar Research Services LLC | 07-11-18

With Fox's original offer for Sky we saw two primary advantages for its bid. First, it already owned 39.1% of Sky's shares, so only needed another 11% of shareholders to vote for it and second, Comcast needed to clear the regulatory process. With the removal of these advantages by making the Fox deal dependent on 50% of the vote not controlled by Fox and quick regulatory approval of Comcast's offer, on July 11 Fox increased its bid for Sky to GBX 1400 per share from GBX 1075. This is higher than Comcast's offer of GBX 1250. This new deal from Fox has been recommended by the independent directors of the board. As part of the agreement with the board, Fox has the right to change the offer from a scheme of arrangement to a contractual offer, removing the requirement of 50% of votes excluding Fox. The independent directors that combined own just over 0.5% of the shares all agreed to vote for this deal. Thus, Fox needs just 10.4% of the votes from other shareholders to close the deal. The deal is still dependent on final U.K. regulatory approval, which we believe is likely. The offer will also be reduced by the final dividend of roughly GBX 22 per share if the deal doesn't close before the dividend is paid. As we already model the dividend being paid, we are raising our fair value estimate to GBX 1378 (the amount of the GBX 1400 per share offer minus the GBX 22 per share dividend). We acknowledge the stock is trading higher than this on the expectation of a higher offer from Comcast. However, we already believe Fox's offer is above Sky's independent fair value, and creating additional synergies to justify continually higher prices is becoming more difficult. So, while a higher bid could happen, we are not betting on it. At this point we don't believe the higher price being offered affects our fair value estimates of $46 per share for Fox or $130 per share for Disney. We are also maintaining our narrow moat rating on Sky and wide moat ratings on Fox and Disney.

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.

©2018 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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