The commentary, analysis, references to, and performance information contained within Morningstar® DividendInvestor℠, except where explicitly noted, reflects that of portfolios owned by Morningstar, Inc. that are invested in accordance with the Dividend Select strategies managed by Morningstar Investment Management LLC, a registered investment adviser and subsidiary of Morningstar, Inc. Throughout the newsletter, references to “Morningstar” refer to Morningstar, Inc. and/or, where applicable, its affiliates.
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.
Opinions expressed are as of the current date and subject to change without notice. Morningstar, Inc. and Morningstar Investment Management shall not be responsible for any trading decisions, damages, or other losses resulting from, or related to, the information, data, analyses or opinions contained herein or their use, which do not constitute investment advice, are provided as of the date written, and are provided solely for informational purposes. This newsletter, including its data and commentary, is for informational purposes only and has not been tailored to suit any individual. References to specific securities or investment options should not be considered an offer to purchase or sell that specific investment. There is no guarantee that the objective of any investing strategy will be achieved.
Employees of Morningstar or its affiliates may have holdings in the stocks shown herein. All data presented is based on the most recent information available to Morningstar as of the date indicated and may not be an accurate reflection of current data. There is no assurance that the data will remain the same.
This commentary contains certain forward-looking statements. 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.
The performance shown herein should in no way be considered indicative of, or a guarantee of the actual or future performance of, or viewed as a substitute for any portfolio invested in a similar strategy. Performance data shown represents past performance which does not guarantee future results.
Morningstar Investment Management provides portfolio construction and ongoing monitoring and maintenance of model portfolios offered by a subsidiary through a discretionary advisory program. Discretionary accounts include those where our subsidiary has total authority over the investment management process and trading authority without any constraints that would hinder the ability to implement the intended strategy. Composites are created to group the accounts in the program by investment objective and allocation targets. Accounts are included in a composite at the beginning of the first full calendar month and are excluded at the end of the last full month the account is under management or fails to meet the composite definition. Accounts must meet a minimum asset level of $500 to be included in a composite and composite performance is expressed in United States dollars. Additional information about the composites and their construction are available upon request. The purpose in presenting composite performance is to provide a historical indication of the performance of this strategy. The actual results for an individual account within a composite may differ, sometimes substantially, from the composite’s historical performance shown here and may include an individual client incurring a loss.
Composite performance is presented below. An asset- and time-weighted return is calculated by weighting individual account returns using beginning-of-period values. For an account, time-weighted returns is a method of calculating period-by-period returns that reflect the change in value and negates the effect of cash flows in or out of an account. Returns are calculated on a monthly basis using either daily valuation total return (which includes realized and unrealized gains and losses plus income for the measurement period) or the Modified Dietz method (which accounts for the timing of cash flows and assumes a constant rate of return over the time period) and are geometrically linked. Returns for periods over one year are annualized.
Returns for individual holdings of an account are time-weighted trailing returns, which takes the change in a security’s net asset value (NAV), assuming the reinvestment of all income (in the form of dividends or interest payments) and capital gains distributions (on the actual reinvestment date used by the security) during the period and dividing by the initial NAV. Account returns are calculated by weighting the individual holding returns. The account returns do not reflect the deduction of custodian fees or the effects of taxation. If included, the actual performance would be lower than that shown.
Gross returns reflect the deduction of trading costs and fund expenses, the reimbursement of dividends, interest, and capital gains, and include the returns of cash or cash equivalent vehicles. Net returns reflect the deduction of a model fee equal to the maximum advisory fee that could be charged to the strategy through Morningstar Investment Services’ advisory program, brokerage or other commissions, and other expenses that a client paid in connection with the advisory services they received, and are calculated by deducting these fees from the gross returns.
Performance shown for Morningstar’s Dividend Select portfolios does not include the deduction of advisory fees given that this newsletter is intended for self-directed investors who have not hired an investment adviser to manage their account. Performance shown for Morningstar’s portfolios does include the deduction of commissions. Reinvestment of all dividends and master limited partnership (MLP) distributions is assumed, although they may not be reinvested into the stock or unit that paid the dividend or distribution. The effects of taxation, other than foreign tax withholdings that may be applied to foreign stocks, are not taken into account. If these fees and expenses were included, the performance shown would be lower.
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. American Depositary Receipts (“ADRs”) are foreign stocks listed on a U.S. exchange. Investment risks associated with ADRs and foreign stocks include, but are not limited to, currency, inflationary, and liquidity risks as well as the risk of adverse political, economic and social developments of the underlying issuer’s home country. The underlying issuers of certain ADRs are under no obligation to distribute shareholder communications to ADR holders, or to pass through any voting rights with respect to the deposited securities. Dividends are not guaranteed and are paid at the discretion of the stock-issuing company.
Benchmark performance represents the return of an index. Indexes are not available for direct investment, and the performance does not reflect fees or expenses associated with investing in securities. Benchmarks provide historical market data that serves as a point of references for an investment and/or strategy. The S&P 500 Index is a market capitalization-weighted index composed of the 500 most widely held stocks whose assets and/or revenues are based in the U.S. It is often used as a proxy for the U.S. stock market. The Dow Jones U.S. Select DividendTM Index is an annual dividend weighted index composed of 100 stocks. It is used as a proxy for the U.S.'s leading stocks by dividend yield.
Portfolio tables include a list of all holdings in Morningstar's Dividend Select and Dividend Select Deferred portfolios as of the date indicated. This information is subject to change at any time.
The Investment Theses and Latest Thoughts section includes the editor’s analysis and/or rationale for including each stock in Morningstar’s Dividend Select and Dividend Select Deferred portfolios. All opinions are those of the editor, and may include forward looking statements.
Research Roundup is a sampling of Morningstar’s equity research analysis and notes for the Dividend Select and Dividend Select Deferred portfolios’ current holdings published since DividendInvestor’s last publication date. Analyst notes chosen for inclusion are prioritized based first on changes in moat ratings, then on changes in fair value uncertainty ratings, and then on changes in fair value estimates.
Income Bellwethers contains 100 companies that are selected on the basis of their potential appeal for income-oriented investors. Selection criteria includes Morningstar, Inc. economic moat ratings of narrow or wide, dividend yields that typically exceed that of the S&P 500, and company size as measured by market capitalization. Individual companies may or may not be potential candidates for purchase in the Dividend Select or Dividend Select Deferred portfolios, and are included for informational purposes only.
The Portfolio Focus section contains Morningstar, Inc.’s analyses of several stocks that are currently held in Morningstar’s Dividend Select and/or Dividend Select Deferred accounts. Companies are rotated on a regular basis with the intention that each holding will appear at least once per calendar year. The contents of these sections have been previously published by Morningstar, and have been edited for length. Morningstar’s analysis is provided for informational purposes only.
Securities identified in DividendInvestor, to the extent that they reflect holdings of Morningstar’s Dividend Select and/or Dividend Select Deferred portfolios, do not include all of the securities purchased, sold, or recommended by Morningstar Investment Management for Morningstar’s portfolios. You should not assume that investments in the securities identified and discussed were or will be profitable.
Annual Dividend per Share is the amount of dividends paid by the company in a year divided by the number of outstanding shares.
Our Capital Allocation (or Stewardship) Rating represents our assessment of the quality of management’s capital allocation, with particular emphasis on the firm’s balance sheet, investments, and shareholder distributions.
Analysts consider companies’ investment strategy and valuation, balance sheet management, and dividend and share buyback policies. Corporate governance factors are only considered if they are likely to materially impact shareholder value, through either the balance sheet, investment, or shareholder distributions. Analysts assign one of three ratings: "Exemplary", "Standard", or "Poor". Analysts judge Capital Allocation from an equity holder’s perspective. Ratings are determined on a forward looking and absolute basis. The Standard rating is most common as most managers will exhibit neither exceptionally strong nor poor capital allocation.
Capital Allocation (or Stewardship) analysis published prior to Dec. 9, 2020, was determined using a different process. Beyond investment strategy, financial leverage, and dividend and share buyback policies, analysts also considered execution, compensation, related party transactions, and accounting practices in the rating.
Dividend Growth measures the growth of company dividends over the past five fiscal years. It is the compounded growth rate between the dividends paid out over the most recent trailing 12 months and the dividends paid out over the trailing 12 months six years ago. Growth in dividends is usually a signal that management has confidence in the company's continued earnings power.
Dividend Yield is a measure of the dividends per share of the company over the trailing one-year period as a percentage of the current stock price.
Earnings per Share, or EPS, is how much profit a company has made per share within a given period. Comparing a company’s most recent EPS to its EPS in previous years and quarters (adjusted for any splits) is one of the most common ways of telling how fast the company’s profits are growing.
Earnings per Share Growth represents the annualized rate of net-income-per-share growth over the trailing one-year period for the stocks held by a fund. Earnings-per-share growth gives a good picture of the rate at which a company has grown its profitability per unit of equity.
All things being equal, stocks with higher earnings-per-share growth rates are generally more desirable than those with slower earnings-per-share growth rates. One of the important differences between earnings-per-share growth rates and net-income growth rates is that the former reflects the dilution that occurs from new stock issuance, the exercise of employee stock options, warrants, convertible securities, and share repurchases.
Fair Value Estimate is a proprietary Morningstar data point that displays a Morningstar analyst's estimate of what a stock is worth. Each stock's fair value is estimated by utilizing a proprietary discounted cash flow model (DCF). This model assumes that the stock's value is equal to the total of the free cash flows of the company is expected to generate in the future, discounted back to the present at the rate commensurate with the riskiness of the cash flows. As with any DCF model, the ending value is highly sensitive to Morningstar's projections of future growth.
The Five-Year Growth Forecast is the estimate of the annual earnings per share growth rate for the next five year.
Free Cash Flow per Share is operating cash flow minus capital spending. Free cash flow represents the cash a company has left over after investing in the growth of its business. Young, aggressive companies often have negative free cash flow, because they’re investing heavily in their futures. As companies mature, though, they should start generating free cash flow.
Free Cash Flow per Share Growth is the percentage change in the Free Cash Flow per Share from the previous year. Free Cash Flow per Share is calculated by dividing free cash flow by the number of shares outstanding.
Free Cash Flow Yield is free cash flow divided by revenue.
The value of a company as determined by the market price of its outstanding common stock. It is calculated by multiplying the market price as of the close of trading as of the last day of the most recent month-end by the number of shares outstanding as of the most recently completed fiscal quarter. It may be used as an indicator of how investors value a company's future prospects.
Moat Size is a measure of the competitive barrier, if any, that gives a company an advantage over its rivals and allows it to generate above-average returns on invested capital. Four major types of economic moats are high customer switching costs, economies of scale, intangible assets such as brands or patents, and the network effect. Morningstar divides stocks into three categories according to moat size: wide moat (companies with the strongest competitive advantage), narrow moat (those with some competitive advantage), and no moat (those with no sustainable competitive advantage)
Moat Trend reflects whether the underlying sources of a company’s competitive advantage (or potential sources of advantage) are improving over time (positive moat trend), weakening over time (negative moat trend), or neither strengthening or weakening (stable moat trend). A company may also get a negative moat trend if they face a substantial competitive threat that is growing. Moat trends tend to change more frequently than economic moats.
An economic moat enables a company to generate returns on invested capital above its cost of capital for a long period of time. Morningstar has identified five sources of economic moats: intangible assets, customer switching costs, cost advantages, network effects, and efficient scale. Morningstar assigns stocks one of three moat ratings: wide moat (companies with the longest-lasting competitive advantages), narrow moat (those with less durable competitive advantages), and no moat (those with no sustainable competitive advantage).
The Morningstar RatingTM for Stocks is a forward-looking, analyst-driven measure of a stock's current price relative to the analyst's estimate of what the shares are worth. Stock star ratings indicate whether a stock, in the equity analyst's educated opinion, is cheap, expensive, or fairly priced. To rate a stock, an analyst estimates what he thinks it is worth (its "fair value"), using a detailed, long-term cash flow forecast for the company. A stock's star rating depends on whether its current market price is above or below the fair value estimate. Those stocks trading at large discounts to their fair values receive the highest ratings (4 or 5 stars). Stocks trading at large premiums to their fair values receive lower ratings (1 or 2 stars). A 3-star rating means the current stock price is fairly close to the analyst's fair value estimate.
Sharpe Ratio uses standard deviation and excess return (a measure of a security or portfolio’s return in excess of the U.S. Treasury three-month Treasury Bill) to determine the reward per unit of risk.
Standard deviation is a statistical measure of the volatility of the security or portfolio’s returns. The larger the standard deviation, the greater the volatility of return.
The Morningstar Style Box reveals a portfolio investment strategy as of the date noted on this report.
For equity portfolios, the vertical axis shows the market capitalization of the long stocks owned, and the horizontal axis shows the investment style (value, blend, or growth.) A darkened square in the style box indicates the weighted average style of the portfolio.
For portfolios holding fixed-income investments, a Fixed Income Style Box is calculated. The vertical axis shows the credit quality based on credit ratings and the horizontal axis shows interest-rate sensitivity as measured by effective duration. There are three credit categories - “High”, “Medium”, and “Low - and there are three interest rate sensitivity categories - “Limited”, “Moderate”, and “Extensive” - resulting in nine possible combinations. As in the equity Style Box the combination of credit and interest rate sensitivity for a portfolio is represented by a darkened cell in the matrix.
Morningstar uses credit rating information from credit rating agencies (CRA’s) that have been designated Nationally Recognized Statistical Rating Organizations (NRSRO’s) by the Securities and Exchange Commission (SEC) in the United States. For a list of all NRSROs, please visit https://www.sec.gov/ocr/ocr-learn-nrsros.html. Additionally, Morningstar will use credit ratings from CRA’s which have been recognized by foreign regulatory institutions that are deemed the equivalent of the NRSRO designation.
To determine the rating applicable to a holding and the subsequent holding weighted value of a portfolio two methods may be employed. First is a common methodology approach where if a case exists such that two rating organizations/ agencies have rated a holding, the lower rating of the two should be applied; if three or more CRA’s have rated a holding, the median rating should be applied, and in cases where there are more than two ratings and a median rating cannot be determined, the lower of the two middle ratings should be applied. Alternatively, if there is more than one rating available an average can be calculated from all and applied. Please Note: Morningstar, Inc. is not an NRSRO nor does it issue a credit rating on the fund. Credit ratings for any security held in a portfolio may change over time.
Morningstar uses the credit rating information to calculate a weighted-average credit quality value for the portfolio. This value is based only upon those holdings which are considered to be classified as “fixed income”, such as government, corporate, or securitized issues. Other types of holdings such as equities and many, though not all, types of derivatives are excluded. The weighted-average credit quality value is represented by a rating symbol which corresponds to the long-term rating symbol schemas employed by most CRA’s. Note that this value is not explicitly published but instead serves as an input in the Morningstar Style Box calculation. This symbol is then used to map to a Style Box credit quality category of “low,” “medium,” or “high”. Funds with a "low" credit quality category are those whose weighted-average credit quality is determined to be equivalent to the commonly used High Yield classification, meaning a rating below “BBB”, portfolios assigned to the “high” credit category have either a “AAA” or “AA+” average credit quality value, while "medium" are those with an average rating of “AA” inclusive to “BBB-“. It is expected and intended that the majority of portfolios will be assigned a credit category of “medium”.
For assignment to an interest-rate sensitivity category Morningstar uses the average effective duration of the portfolio. From this value there are three distinct methodologies employed to determine assignment to category. Portfolios which are assigned to Morningstar municipal-bond categories employ static breakpoints between categories. These breakpoints are: (i) “Limited” equal to 4.5 years or less; (ii) “Moderate” equal to 4.5 years to less than 7 years, and (iii) “Extensive” equal to more than 7 years. For portfolios assigned to Morningstar categories other than U.S. Taxable, including all domiciled outside the United States, static duration breakpoints are also used. The values differ from the municipal category values: (i) “Limited” equals less than or equal to 3.5 years, (ii) “Moderate” equals greater than 3.5 years but less than or equal to 6 years, (iii) “Extensive” is assigned to portfolios with effective durations of more than 6 years. Note: Interest-rate sensitivity for non-U.S. domiciled portfolios (excluding those in Morningstar convertible categories) may be assigned using average modified duration when average effective duration is not available.
For portfolios Morningstar classifies as U.S Taxable Fixed-Income, interest-rate sensitivity category assignment is based on the effective duration of the Morningstar Core Bond Index (MCBI). The classification assignment is dynamically determined relative to the benchmark index value. A “Limited” category will be assigned to portfolios whose average effective duration is between 25% to 75% of MCBI average effective duration, where the average effective duration is between 75% to 125% of the MCBI the portfolio will be classified as “Moderate”, and those portfolios with an average effective duration value 125% or greater of the average effective duration of the MCBI will be classified as “Extensive”.
Operating Margin captures how much a company makes or loses from its primary business per dollar of sales. It is calculated by dividing operating income or loss by sales.
The Price/Earnings Ratio (or P/E Ratio) for a portfolio is the weighted average of its stock holdings’ P/E ratios. The P/E ratio of a stock is the stock’s current price divided by the company’s trailing 12-month earnings per share. A high P/E ratio usually indicates the market will pay more to obtain the company’s earnings because it believes in the company’s abilities to increase their earnings. A low P/E ratio indicates the market has less confidence that the company’s earnings will increase, however value investors may believe such stocks have an overlooked or undervalued potential for appreciation.
The Price/Fair Value Ratio (or P/FV Ratio) for a portfolio is the weighted average of its stock holdings’ price/fair value ratios. The price/fair value ratio of a stock is the stock’s current price divided by a Morningstar analyst’s estimate of the company’s worth.
The Price/Sales Ratio for a portfolio is the weighted average of its stock holdings’ Price/Sales ratio. Price/Sales ratio is a stock's current price divided by the company's trailing 12-month sales per share. Price/sales represents the amount an investor is willing to pay for a dollar generated from a particular company's operations.
Return on Equity is the percentage a company earns on its total equity in a given year. The calculation is return on assets times financial leverage. Return on equity shows how much profit a company generates on the money shareholders have invested in the firm.
Return on Invested Capital is the percentage a company earns on its invested capital in a given year. The calculation is net operating profit after tax divided by average invested capital. The resulting figure is then multiplied by 100. Invested capital equals the sum of total stockholders’ equity, long-term debt and capital lease obligation, and short-term debt and capital lease obligation. Return on Invested Capital shows how much profit a company generates on its capital base.
Revenue is a measure of how much money a company has brought in within a given period.
Revenue Growth represents the percentage growth in a company's revenue over either the trailing 12 months or the trailing three years. Revenue growth gives a good picture of the rate at which companies have been able to expand their businesses. All things being equal, stocks with higher revenue growth rates are generally more desirable than those with slower revenue growth rates.
A sector is a company’s general area of business. Morningstar divides stocks into 11 sectors according to their primary business, grouped into three larger Super Sectors. The Communication Services, Energy, Industrials and Technology sectors make up the Sensitive Super Sector; Healthcare, Consumer Defensive and Utilities make up the Defensive Super Sector; and Basic Materials, Consumer Cyclical, Financial Services and Real Estate form the Cyclical Super Sector.
Because sectors can differ greatly in their characteristics, comparing a stock with its sector rather than the market as a whole is generally a better way of putting it in the proper context.
Style % is a derivation of the Morningstar Style Box that reveals a plan’s investment strategy. For equity holdings, the vertical axis shows the market capitalization of the stocks owned and the horizontal axis shows investment style (value, blend, or growth). For fixed-income holdings, the vertical axis shows the average credit quality of the bonds owned and the horizontal axis shows interest rate sensitivity as measured by a bond’s duration (limited, moderate, or extended). The boxes contain the percentage of stocks in the portfolios that fall in that box.
Total Return, or "Non Load-Adjusted Return", reflects performance without adjusting for sales charges (if applicable) or the effects of taxation, but it is adjusted to reflect all actual ongoing expenses and assumes reinvestment of applicable dividends and capital gains. Total returns for periods longer than one year are expressed in terms of compounded average annual returns (also known as geometric total returns). If adjusted for sales charges and the effects of taxation, the performance quoted would be significantly reduced.
Relative total return indicates how a portfolio has performed relative to its peers (as measured by its Benchmark Index) over the time periods shown.
The Total Cumulative Return graph shows the effect of the market value change of a portfolio, individual security, and/or index over specific time periods. The cumulative return is the percentage increase or decrease of a portfolio or security since its initial purchase.
Morningstar’s Uncertainty Rating is designed to capture the range of potential outcomes for a company’s intrinsic value. The rating begins with a suggested rating produced by a quantitative process based on the trailing 12-month standard deviation of daily stock returns. An analyst overlay is then applied, with analysts using the suggested rating, historical rating data, and their own knowledge of the company to inform them as they make the final Uncertainty Rating decision. Our Uncertainty Rating is meant to consider anything that can increase the potential dispersion of outcomes for the intrinsic value of a company, and anything that can affect our ability to predict these outcomes accurately. These can include cyclical factors, operational and financial factors such as leverage, company-specific events, ESG risks, and anything else that might increase the potential dispersion of future outcomes and our ability to estimate those outcomes. We have five different ratings: Low, Medium, High, Very High, or Extreme. Our recommended margin of safety—the discount to fair value demanded before we’d recommend buying or selling the stock—widens as our uncertainty of the estimated value of the equity increases.
Yield is the annual dividend per share divided by the current stock price.
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