June 2018 Vol. 14 No.
5
DividendInvestor
Quality insights for current income and income growth from stocks
The Case for Dividends
by David Harrell and Michael Hodel, CFA
We concluded last month’s cover story with the
case against dividend investing, listing several common
arguments against a dividend-oriented investment
strategy. This month, we’re donning our pro-dividend
hats to push back against those arguments. The
lagging performance of many traditional dividend sec-
tors recently, and the anti-dividend voices that this
has emboldened, makes this case all the more important
to reiterate today.
No Free Lunch
As we noted last month, dividends aren’t free, as the
share price generally adjusts by an amount that’s
approximately equal to the dividend payment. All else
being equal, if a stock with an annual total return
of 9% began issuing a dividend that equated to a 3%
annual yield, you’d be left with a stock that provided
a 6% capital return in addition to that 3% yield.
We can imagine a world where the stock market is
neatly divided into two groups of stocks. Let’s assume
for this example that both groups provide returns of
9% a year, but one does it via capital appreciation alone,
while the other reaches 9% via a 3% yield and 6%
capital appreciation. Such a hypothetical investment
world is frequently used in the case against dividends,
as it makes for a compelling argument. In such a world,
there is no good reason to buy dividend stocks, as they
would provide no tangible benefit yet investors would
be saddled with taxes and other disadvantages. How-
ever, this imaginary world is something of a straw man
Morningstar DividendInvestor
argument, and the advantages it confers to non-divi-
dend-paying stocks don’t always align with real life.
Taxes
In a taxable account, there’s no getting around the fact
that dividends can hinder the tax efficiency of long-
term investments. Whether or not investors want or
need current income, dividends are taxable events
that can be a drag on a stock’s long-term total return. If
dividend payments are reinvested in additional shares,
investors must either hold back a portion of the dividend
to pay capital gains taxes or use other funds to pay
those taxes. However, for investors who are seeking
current income, the tax burden for qualified divi-
dends is no greater than the long-term capital gains rate.
Investors who “create their own dividend” by selling
appreciated shares of a nondividend stock will usually
owe taxes on their long-term capital gains. In such
situations, the tax rate for U.S. investors is the same.
Someone Else’s Schedule
It’s also true that dividend investors receive income
based on the payout schedules of the stocks they own.
The vast majority of U.S. dividend payers provide a
quarterly dividend; a few, such as Realty Income O,
provide a monthly check. Still, because different
companies use different fiscal calendars and are there-
fore paying dividends during different months, it’s
possible to construct a dividend portfolio that provides
some income each month, though it is likely to be
somewhat lumpy. (See the Upcoming Dividend Pay-
ments table on Page 6 for an example of varying
payment cycles for a portfolio of dividend stocks.)
But we believe there’s a bigger scheduling issue here.
Over the long term, both dividend growth and price
appreciation are driven by earnings growth. In the short
term, however, market sentiment can push prices
Continued on Page 2
June 2018 1
SM
Michael Hodel, CFA
Editor
Portfolio Manager
Morningstar Investment Management LLC
David Harrell
Managing Editor
DividendInvestorSM 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,
which manages other client portfolios
using these strategies. The perfor-
mance information shown herein
does not reflect the deduction of
advisory and/or other fees normally
incurred in the management of
a portfolio. Please see pages 22–23
for performance that includes
the deduction of these fees and for
additional important information.
Portfolio Roundup 3
Dividend Select Portfolios 4
Research Roundup 11
Portfolio Focus 13
Compass Minerals,
Dominion Energy, Pfizer
Dividend Drill 16
Kraft Heinz, PepsiCo
Income Bellwethers 18
Disclosures 22
2 The Case for Dividends
Questions? Comments?
You can contact the editorial
team for DividendInvestor via
email at mdi@morningstar.com.
We can’t promise a reply to every
message, but we do read them all,
and when a topic shows up
repeatedly we will address it for all
subscribers in DividendInvestor
or our weekly email update.
Please see Page 22 for the
calendar-year returns for Morning-
star Investment Management’s
Dividend Select strategy since its
inception, which includes the
deduction of a maximum annual
1.65% advisory fee.
Continued From Page 1
up and down, to levels that are out of alignment with
fundamentals. If investors with a need for income
are required to sell shares to generate income, this
misalignment can be helpful, in situations where
stock prices have appreciated beyond a reasonable
valuation level. However, it can be harmful when
the opposite occurs, forcing investors to sell a larger por-
tion of their shares to generate the needed income.
Relying on dividends rather than stock sales can
eliminate this uncertainty. In the case of an extended
economic turndown, some companies may be forced
to reduce their dividends if they’re no longer supported
by earnings and cash flow. However, even during the
financial crisis, most companies were able to sustain
all or a portion of their dividends, allowing investors
to continue receiving income without reducing their
share count at extremely depressed valuations. When
share prices eventually recover following a bear market,
investors who were able to hold on to their shares
will typically be in a better spot than investors who had
to sell shares to produce income.
Missing Out on the Best-Performing Stocks
FOMO—the fear of missing out—permeates many
aspects of our lives; it’s often blamed for the scatter-
brained state of today’s social media addicts. With
investing, missing out on the best-performing stocks can
result in worse relative returns. Yet if we’re going
to cite examples of high-returning stocks that dividend
investors have missed out on—Alphabet GOOG,
Facebook FB, Amazon AMZN, and so on—we could
also cite examples of nondividend stocks that have
underperformed dividend-oriented portfolios as well
as the broad market.
That said, choosing to invest in dividend stocks does
narrow your investment universe. Approximately 75%
of U.S. companies currently do not pay a dividend.
When you construct a dividend portfolio, it’s going to
perform differently from the broad market because
it’s different from the broad market. Periods of relative
underperformance are inevitable. Over the longer
term, however, there is considerable historical evidence
that dividend-paying stocks have outperformed non-
payers. While the past isn’t a guarantee of the future,
it stands to reason that companies dedicated to
generating consistent returns for shareholders will
perform more consistently over time, with less of their
returns subject to the whims of investors.
Allegiance to Dividends Can Lead to Bad Decisions
In a blog post1 from February, Aswath Damodaran, a
professor of finance at NYU’s Stern School of Business,
summed up the problem of the “stickiness” of divi-
dends: “Companies, once committed to paying dividends,
are unwilling to either cut or stop paying dividends,
for fear of market punishment. That stickiness translates
into companies continuing to pay dividends, even
as earnings collapse and/or investment opportunities
expand.” In last month’s cover story, we pointed to
telecommunications companies as an example of this.
But which is more common—a bad decision made
to support an unsustainable dividend, or prudence in
seeking to sustain a dividend for the long term?
Companies that pay meaningful dividends tend to be
more conservative with their balance sheets and
take less risk in allocating capital to new ventures or
mergers and acquisitions. Damodaran, in the post
referenced above, wrote, “A company that reinvests cash
in a bad business is destroying value, not adding to
it, and…a preponderance of companies globally earn
less than their costs of capital.”
What’s more, poor decisions when returning cash to
shareholders via buybacks are probably more common
than when supporting a dividend. The former approach
is certainly becoming more common. In 2017, 54% of all
cash returned to shareholders came in the form of
share repurchases. Yet as we explored in the July 2017
cover story, management teams aren’t immune to
basic investor psychology and, as Berkshire Hathaway
BRK.B CEO Warren Buffett has lamented, the value
of buybacks for continuing shareholders depends on the
price at which shares are repurchased. Too often,
he noted, companies speak of the merits of buybacks
when their shares are undervalued, but their actual
repurchase activity doesn’t align with share valuation.
Rising Interest Rates
As we’ve written multiple times in this newsletter, a
rising-rate environment affects all asset classes.
Dividend investors are no longer benefiting from the

Exhibit 1: Performance of Higher-Yielding Stocks Over 90 Years
16
16%
Cumulative Excess Rtns of High Div. vs. Low Div. Stocks
12
12
88
44
0 1930 1940
Source: Ibbotson Associates, Treasury.gov, and the data library of Professor Kenneth French.
Damodaran, Aswath, 2018. “Divi-
1 tailwind of a falling-rate environment and now face
dends, Stock Buybacks and
Cash Holdings.” Feb. 4, 2018.
Musings on Markets. http://
aswathdamodaran.blogspot.
com/2018/02/january-2018-
data-update-9-dividends.html
Includes portfolio holdings Coke
1
KO, General Mills GIS, Altria
MO, Philip Morris PM, Hanes-
brands HBI, and Procter
& Gamble PG. Also includes
J.M. Smucker SJM, VF Corp
VFC, Nike NKE, Newell Brands
NWL, Campbell Soup CPB,
Mondelez MDLZ, McCormick MKC,
Kraft Heinz KHC, Kellogg K,
Unilever UL, Colgate-Palmolive
CL, Kimberly-Clark KMB, and
Pepsi PEP.
6.25%
4.75
3.25
10-Year Treasury
1.75
1950 1960 1970 1980 1990 2000 2010
the headwind of a rising-rate environment. However,
if we look at a 90-year history of 10-year Treasury
rates and the relative performance of higher- and lower-
yielding stocks as depicted in Exhibit 1, we still see
periods of positive trends for higher-yielding stocks,
even when rates were rising.
The Behavioral Argument
In the end, investor behavior is arguably a bigger driver
of investment returns than security selection. Here
we see a potential advantage for dividend stocks that
Portfolio Roundup
by Michael Hodel, CFA
The consumer staples sector, long a core area for
dividend investors, has fallen sharply out of favor in
recent months, adding to the Dividend Portfolios’
recent struggles. The pressures facing these companies
aren’t new. The rise of digital marketing and platforms
like Alphabet’s GOOG YouTube have enabled small start-
ups to quickly launch niche brands in an “authentic”
manner that resonates with many consumers. The rise
of Amazon AMZN continues to remake the retail
landscape, prompting changes in consumer buying
patterns and forcing retailers to push suppliers to
lower prices. At the same time, rising input prices are
Morningstar DividendInvestor June 2018 3
goes beyond relative investment returns. The primary
investment goal of most individual investors is to fund
their eventual retirement. An investment strategy
that results in a growing, spendable cash stream pro-
vides investors with a better understanding of the
relationship between their portfolio and future income
goals. Perhaps it even encourages them to increase
their total investments, as they see the additional divi-
dend income that results from each incremental
dollar they invest.
Again, a portfolio of dividend stocks is different from a
broad market portfolio or benchmark, and it will per-
form differently for any given period. While we can point
to past examples of the strength of higher-yielding
securities, there is no guarantee that a dividend-oriented
strategy will outperform, or will do so for any given
period. Yet we continue to believe that a portfolio of
well-chosen dividend stocks can provide a steady
stream of increasing annual income. K
starting to offset the cost-cutting many consumer
goods companies have implemented in recent years.
While these threats have been building for some time,
the impact on investor sentiment and stock prices
has hit more recently. Looking across a basket of 19
dividend-paying consumer staples companies that
I track1, the average share price to trailing earnings per
share has dropped to below 16 times from more than
19 times at the start of 2018 and a recent peak of 23 times
during the summer of 2016. The changes rattling the
consumer landscape warrant careful consideration, but
I believe the outlook for these companies is brighter
than market prices might imply. The consumer sector
has always been highly competitive and faced chang-
ing tastes, buying patterns, and media habits over the
decades. I suspect that the scale advantages that
large consumer goods companies enjoy, around product
Continued on Page 6
 4

% Dividend Select Portfolio

Morningstar Ratings & Fundamentals Portfolio Data

Star Economic Fair Fair Val Current Price/ Div Yield Owned # of Current % of Annual
Portfolio Holding Rating Moat Value Uncert Price Fair Value Rate (%) Since Shares Value Port Income
P Magellan Midstream MMP QQQQ Wide 71.00 Low 69.04 0.97 3.75 ] 5.4 2008 380 26,235 5.3 1,425
R Realty Income O QQQQ None 59.00 Medium 52.87 0.90 2.63 5.0 2006 475 25,113 5.0 1,251
Wells Fargo & Co. WFC QQQQ Wide 65.00 Medium 53.76 0.83 1.56 2.9 2005 435 23,386 4.7 679
Duke Energy DUK QQQQ Narrow 87.00 Low 77.64 0.89 3.56 4.6 2015 275 21,351 4.3 979
Pfizer PFE QQQQ Wide 43.50 Low 35.17 0.81 1.36 3.9 2016 605 21,278 4.3 823
Amgen AMGN QQQQ Wide 198.00 Medium 169.64 0.86 5.28 3.1 2017 125 21,205 4.3 660
Johnson & Johnson JNJ QQQ Wide 130.00 ] Low 123.51 0.95 3.60 ] 2.9 2005 165 20,379 4.1 594
P Spectra Energy Partners SEP QQQQQ Wide 48.00 Low 32.66 0.68 3.01 ] 9.2 2012 620 20,249 4.1 1,863
Southern Company SO QQQQ Narrow 51.00 Low 43.79 0.86 2.40 ] 5.5 2013 400 17,516 3.5 960
R Welltower WELL QQQQ None 74.00 High 55.38 0.75 3.48 6.3 2008 315 17,445 3.5 1,096
Emerson Electric EMR QQQ Wide 73.00 ] Medium 71.93 0.99 1.94 2.7 2012 225 16,184 3.2 437
R Ventas VTR QQQQ None 65.00 [ High 53.15 0.82 3.16 5.9 2015 300 15,945 3.2 948
R Lamar Advertising LAMR — — — — 66.10 NA 3.64 5.5 2016 235 15,534 3.1 855
Compass Minerals CMP QQQQ Wide 83.00 ] High 69.00 0.83 2.88 4.2 2015 225 15,525 3.1 648
BB&T BBT QQQ Narrow 51.00 Medium 54.92 1.08 1.50 2.7 2017 275 15,103 3.0 413
Coca-Cola KO QQQQ Wide 48.50 Low 41.78 0.86 1.56 3.7 2014 360 15,041 3.0 562
Procter & Gamble PG QQQQQ Wide 98.00 Low 72.37 0.74 2.87 4.0 2011 200 14,474 2.9 574
Verizon Communications VZ QQQ Narrow 52.00 Medium 46.38 0.89 2.36 5.1 2015 300 13,914 2.8 708
United Parcel Service UPS QQQ Wide 113.00 [ Medium 111.40 0.99 3.64 3.3 2007 120 13,368 2.7 437
P AmeriGas Partners APU QQQ Narrow 46.00 Medium 41.18 0.90 3.80 9.2 2005 320 13,178 2.6 1,216
Hanesbrands HBI QQQQQ Narrow 29.00 Medium 16.56 0.57 0.60 3.6 2017 750 12,420 2.5 450
General Mills GIS QQQQQ Wide 59.00 Low 42.51 0.72 1.96 4.6 2012 275 11,690 2.3 539
Omnicom OMC QQQQ Narrow 85.00 Medium 74.29 0.87 2.40 3.2 2018 145 10,772 2.2 348
Comcast CMCSA QQQQ Wide 42.00 Medium 30.73 0.73 0.76 2.5 2018 350 10,756 2.2 266
Genuine Parts GPC QQQQ Narrow 100.00 Medium 90.19 0.90 2.88 3.2 2016 115 10,372 2.1 331
F BT Group BT QQQQ Narrow 26.00 High 16.26 0.63 0.98 6.1 2018 620 10,081 2.0 611
P Enterprise Products EPD QQQQ Wide 31.00 ] Low 26.93 0.87 1.71 6.3 2015 325 8,752 1.8 556
Altria Group MO QQQQ Wide 64.00 Low 55.92 0.87 2.80 5.0 2009 150 8,388 1.7 420
Philip Morris International PM QQQQ Wide 104.00 Low 81.99 0.79 4.28 5.2 2010 95 7,789 1.6 407

Cash Holdings 44,580 9.0

Portfolio Totals 498,023 100.0 21,054

Legend: Tax Characteristics Investment Objective: Dividend Select

Å Shares added P Master limited partnerships. Income is taxed at ordinary rates, though a
portion of cash distributions may not be taxable until units are sold.
Í Shares sold
May not be suitable for tax- deferred accounts including IRAs, Roth IRAs, and 401(k)s.
C New holding
R Real estate investment trusts; mostly taxed at ordinary rates.
UR Under Review
F Foreign stock, income treated as qualified dividends.
The objective of the Dividend Select portfolio is to hold 20–30 individual stocks
that are expected to provide large, reliable, and growing dividends. The portfolio aims
to earn an average annualized total return of 8%–10% over the course of a market
cycle, composed of a 3%–5% portfolio dividend yield and capital appreciation
(driven by dividend growth) of 4%–6% a year.

Footnotes:
Source: Morningstar, Inc. Ratings, rankings, categorizations, and fair value estimates
are based on the analysis and estimates of analysts of Morningstar, Inc. or its
affiliates. Data is as of May 9, 2018. Dividend Select Portfolio inception: Jan. 7, 2005.
Dividend Select Deferred Portfolio inception: Aug. 8, 2016. Definitions may be
found in the DividendInvestor Subscriber’s Manual.
Invest in the Dividend Select Approach
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To learn more, call 1-866-765-0663.
Morningstar Investment Services LLC, a registered investment adviser and
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section for more information.
 Morningstar DividendInvestor June 2018 5

% Dividend Select Deferred Portfolio

Morningstar Ratings & Fundamentals Portfolio Data

Star Economic Fair Fair Val Current Price/ Div Yield Owned # of Current % of Annual
Portfolio Holding Rating Moat Value Uncert Price Fair Value Rate (%) Since Shares Value Port Income
R Realty Income O QQQQ None 59.00 Medium 52.87 0.90 2.63 5.0 2016 90 4,758 5.1 237
Wells Fargo & Co. WFC QQQQ Wide 65.00 Medium 53.76 0.83 1.56 2.9 2016 83 4,462 4.7 129
Amgen AMGN QQQQ Wide 198.00 Medium 169.64 0.86 5.28 3.1 2017 25 4,241 4.5 132
Dominion Energy D QQQQQ Wide 84.00 Low 62.67 0.75 3.34 5.3 2016 66 4,136 4.4 220
Pfizer PFE QQQQ Wide 43.50 Low 35.17 0.81 1.36 3.9 2016 115 4,045 4.3 156
Duke Energy DUK QQQQ Narrow 87.00 Low 77.64 0.89 3.56 4.6 2016 51 3,960 4.2 182
F Enbridge ENB QQQQQ Wide 47.00 Medium 32.11 0.68 2.09 6.5 2017 119 3,821 4.1 249
Johnson & Johnson JNJ QQQ Wide 130.00 ] Low 123.51 0.95 3.60 ] 2.9 2016 30 3,705 3.9 108
R Welltower WELL QQQQ None 74.00 High 55.38 0.75 3.48 6.3 2016 60 3,323 3.5 209
Southern Company SO QQQQ Narrow 51.00 Low 43.79 0.86 2.40 ] 5.5 2016 73 3,197 3.4 175
Emerson Electric EMR QQQ Wide 73.00 ] Medium 71.93 0.99 1.94 2.7 2016 43 3,093 3.3 83
Procter & Gamble PG QQQQQ Wide 98.00 Low 72.37 0.74 2.87 4.0 2016 42 3,040 3.2 120
R Ventas VTR QQQQ None 65.00 [ High 53.15 0.82 3.16 5.9 2016 57 3,030 3.2 180
R Lamar Advertising LAMR — — — — 66.10 NA 3.64 5.5 2016 45 2,975 3.2 164
Compass Minerals CMP QQQQ Wide 83.00 ] High 69.00 0.83 2.88 4.2 2016 43 2,967 3.1 124
BB&T BBT QQQ Narrow 51.00 Medium 54.92 1.08 1.50 2.7 2017 53 2,911 3.1 80
Coca-Cola KO QQQQ Wide 48.50 Low 41.78 0.86 1.56 3.7 2016 66 2,757 2.9 103
Verizon Communications VZ QQQ Narrow 52.00 Medium 46.38 0.89 2.36 5.1 2016 55 2,551 2.7 130
United Parcel Service UPS QQQ Wide 113.00 [ Medium 111.40 0.99 3.64 3.3 2016 22 2,451 2.6 80
Hanesbrands HBI QQQQQ Narrow 29.00 Medium 16.56 0.57 0.60 3.6 2017 140 2,318 2.5 84
Alliant Energy LNT QQ Narrow 38.00 Low 41.26 1.09 1.34 3.2 2016 54 2,228 2.4 72
General Mills GIS QQQQQ Wide 59.00 Low 42.51 0.72 1.96 4.6 2016 52 2,211 2.3 102
Omnicom OMC QQQQ Narrow 85.00 Medium 74.29 0.87 2.40 3.2 2018 28 2,080 2.2 67
Comcast CMCSA QQQQ Wide 42.00 Medium 30.73 0.73 0.76 2.5 2018 67 2,059 2.2 51
Genuine Parts GPC QQQQ Narrow 100.00 Medium 90.19 0.90 2.88 3.2 2016 21 1,894 2.0 60
F BT Group BT QQQQ Narrow 26.00 High 16.26 0.63 0.98 6.1 2018 115 1,870 2.0 113
PPL Corp. PPL QQQQ Narrow 35.00 Low 27.89 0.80 1.64 5.9 2016 67 1,869 2.0 110
Altria Group MO QQQQ Wide 64.00 Low 55.92 0.87 2.80 5.0 2016 28 1,566 1.7 78
Philip Morris International PM QQQQ Wide 104.00 Low 81.99 0.79 4.28 5.2 2016 18 1,476 1.6 77

Cash Holdings 9,221 9.8

Portfolio Totals 94,213 100.0 3,677

Legend: Tax Characteristics Investment Objective: Dividend Select Deferred

Å Shares added R Real estate investment trusts; mostly taxed at ordinary rates. The Dividend Select Deferred portfolio has the same objectives as Dividend Select,
but it excludes master limited partnerships, whose tax characteristics are not

Í Shares sold F Foreign stock, income treated as qualified dividends. suitable for all investors or account types. As a result, its holdings and the weight-

C New holding ings of each holding are somewhat different.
UR Under Review Footnotes:
Source: Morningstar, Inc. Ratings, rankings, categorizations, and fair value estimates
are based on the analysis and estimates of analysts of Morningstar, Inc. or its
affiliates. Data is as of May 9, 2018. Dividend Select Portfolio inception: Jan. 7, 2005.
Dividend Select Deferred Portfolio inception: Aug. 8, 2016. Definitions may be
found in the DividendInvestor Subscriber’s Manual.
6 Portfolio Roundup
Continued From Page 3

development and marketing in particular, will enable
most to adapt over time. I don’t believe the threats
facing the sector have changed materially in recent
months, but the potential rewards look more attrac-
tive at current valuations.
While all the Dividend Portfolios’ consumer holdings
have struggled, two were hit particularly hard after
their first-quarter earnings releases: Hanesbrands HBI
and Philip Morris PM (with Altria MO struggling in
sympathy). Hanesbrands has been a disappointment
since it was added to the portfolio last year. It failed
to raise its dividend earlier this year, instead increasing
leverage to pursue another acquisition, and the stock
has declined about 25% since our purchase.
Hanesbrands reported 1% year-over-year sales growth
for the first quarter, excluding the impact of acquisi-
tions and currency movements. While growth remains
lackluster, this performance was widely expected,
as Hanesbrands is among the most challenged compa-
nies as traditional retail channels struggle to attract
customers. In fact, growth slightly exceeded Morningstar
Equity Research’s expectations. Yet, management
highlighted a small shift in sales timing that pulled some
business forward, clouding the growth picture. Com-
modity costs have also put some pressure on margins.
Looking a little deeper, Hanesbrands is making progress
in areas that should benefit it over the longer term. Direct
and online sales increased 23% and now represent
more than a fifth of total revenue. Global revenue from
the Champion brand increased 17% on strong growth
outside the U.S. mass retailer channel. Sales outside the
United States increased 19% (7% excluding acquisi-
tions and currency moves). As more sales move away
from traditional retailers in the U.S., Hanesbrands
should gain more control over its relationship with
consumers. Excluding commodity costs, margins
improved slightly in the quarter, as acquisition-related
cost savings have started to materialize.
The Hanesbrands’ near-term challenges will probably
make the next few quarters bumpy, but I believe
investors will be well compensated over the longer term.
The stock currently trades at less than 10 times trailing
earnings and management’s expectations for 2018 while
offering a 3.6% dividend yield. Management has
signaled that it will slow acquisition activity as it inte-
grates recent purchases and brings leverage down

Upcoming Dividend Payments

Payment Payment Anticipated Payment Payment Anticipated
Company Name Cycle Ex Date Pay Date Amount ($) Company Name Cycle Ex Date Pay Date Amount ($)
Alliant Energy LNT 2, 5, 8, 11 04-27-18 05-15-18 0.335 Johnson & Johnson JNJ 3, 6, 9, 12 05-25-18 06-12-18 0.90
Altria Group MO 1, 4, 7, 10 mid June mid July 0.70 Lamar Advertising LAMR 3, 6, 9, 12 mid June late June 0.91
AmeriGas Partners APU 2, 5, 8, 11 05-09-18 05-18-18 0.95 Magellan Midstream MMP 2, 5, 8, 11 05-07-18 05-15-18 0.9375
Amgen AMGN 3, 6, 9, 12 05-16-18 06-08-18 1.32 Omnicom OMC 1, 4, 7, 10 mid June mid July 0.60
BB&T BBT 3, 6, 9, 12 05-10-18 06-01-18 0.375 Pfizer PFE 3, 6, 9, 12 05-10-18 06-01-18 0.34
BT Group BT 2,9 mid Aug mid Sept 0.652
Philip Morris Int'l PM 1, 4, 7, 10 late June mid July 1.07
Coca-Cola KO 4, 7, 10, 12 06-14-18 07-02-18 0.39 PPL PPL 1, 4, 7, 10 early June early July 0.41
Comcast CMCSA 1, 4, 7, 10 07-02-18 07-25-18 0.19 Procter & Gamble PG 2, 5, 8, 11 04-19-18 05-15-18 0.7172
Compass Minerals CMP 3, 6, 9, 12 05-31-18 06-15-18 0.72 Realty Income O Monthly 04-30-18 05-15-18 0.2195
Dominion Energy D 3, 6, 9, 12 05-31-18 06-20-18 0.835 Southern Company SO 3, 6, 9, 12 05-18-18 06-06-18 0.60
Duke Energy DUK 3, 6, 9, 12 05-17-18 06-18-18 0.89 Spectra Energy Partners SEP 2, 5, 8, 11 05-20-18 05-30-18 0.75125
Emerson Electric EMR 3, 6, 9, 12 05-10-18 06-11-18 0.485 United Parcel Service UPS 3, 6, 9, 12 mid May early June 0.91
Enbridge ENB 3, 6, 9, 12 05-14-18 06-01-18 0.5252 Ventas VTR 3, 6, 9, 12 late June mid July 0.79
Enterprise Products EPD 2, 5, 8, 11 late July early Aug 0.431
Verizon Communications VZ 2, 5, 8, 11 early July early Aug 0.59
General Mills GIS 2, 5, 8, 11 mid July early Aug 0.49 Wells Fargo WFC 3, 6, 9, 12 05-03-18 06-01-18 0.39
Genuine Parts GPC 1, 4, 7, 10 06-07-18 07-02-18 0.72 Welltower WELL 2, 5, 8, 11 05-07-18 05-23-18 0.87
Hanesbrands HBI 3, 6, 9, 12 05-14-18 06-05-18 0.15 1
Denotes an increase we expect, but which has not yet been announced.
2
Dividend to be paid in foreign currency, subject to exchange fluctuations. Source: Morningstar.
 Morningstar DividendInvestor June 2018 7

as quickly as possible, a shift that offers more hope for
dividend growth over the medium term.
Philip Morris’ story revolves around its iQOS heat-not-
burn product and Japan. Heat-not-burn promises an
experience similar to traditional smoking but potentially
safer and more convenient. Sales of iQOS stick units
in Japan, the biggest market globally by far, increased
nearly fourfold during the fourth quarter of 2017 to
account for more than 60% of total shipments during
the period. Three months later, though, growth
appeared to hit a wall, with iQOS stick volume falling
by nearly half versus the fourth quarter. This head-
line-grabbing number isn’t as bad as it sounds, as a
major factor behind the swing in unit sales related to
retail inventory building in the fourth quarter and then
reversing somewhat in the first. The bigger problem
for Philip Morris is that sales of iQOS devices, which
are needed to heat the tobacco sticks, fell short of
management expectations. The company attributed the
miss to unanticipated challenges penetrating the
Continued on Page 8

DividendInvestor Portfolio Performance

Dividend Select Portfolio Dividend Select Portfolio: Cumulative Total Return (%)
Top Sectors (%) 215 Dividend Select

u Real Estate 14.9 S&P 500 Index

163
d Healthcare 12.6
DJ US Select Div Idx
s Consumer Defensive 11.5
111
o Energy 11.1
f Utilities 10.5
59

Style Breakdown (%)

7
Value Core Grwth

56 11 0 p 51–100
Lrg

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
p 26–50
21 0 0 p 11–25
Med

Dividend Select Portfolio: Current Yield (4.6%, excluding cash) Dividend Select Portfolio: Price/Fair Value (0.87)
p 0–10
0 3 0 8 1.20
Sm

Div Select Deferred Portfolio 1.00

6
Top Sectors (%)

f Utilities 16.3
5
u Real Estate 15.0 0.80

d Healthcare 12.7 4
s Consumer Defensive 11.7
y Financial Services 7.8 05 06 07 08 09 10 11 12 13 14 15 16 17 05 06 07 08 09 10 11 12 13 14 15 16 17
Dividend Select Deferred – Current Yield: 4.3%, excluding cash Dividend Select Deferred – Price/Fair Value: 0.87
Style Breakdown (%)
Since
Value Core Grwth Total Return (%) Last Month YTD 1-Year 3-Year 5-Year 10-Year Inception

p 51–100 Dividend Select -0.3 -8.1 -4.9 3.8 6.3 8.0 7.9
61 11 0
Lrg

p 26–50 Div. Select Deferred -0.9 -9.2 -5.7 — — — -3.3

15 0 0 p 11–25
Med

S&P 500 1.6 1.5 14.6 11.0 12.9 9.1 8.6

p 0–10
DJ US Select Dividend 0.4 -1.6 8.7 11.3 11.9 9.3 8.0
0 3 0
Sm

Returns for periods longer than 1 year are annualized. Inception dates: Jan. 7, 2005 (Dividend Select) and Aug. 8, 2016 (Deferred)

Source: Morningstar, Inc. Data is as of May 9, 2018. Ratings, rankings, categorizations, and fair value estimates are based on the analysis and estimates of analysts of Morningstar,
Inc. or its affiliates. Returns are shown after commissions and assume reinvestment of dividends and MLP distributions. Returns do not reflect the effects of all taxation,
advisory fees, and/or other expenses normally incurred in the management of a portfolio. If such fees and expenses were included, the performance shown would be lower.
Please see pages 22–23 for additional disclosures and comparable performance information that reflects the effect of advisory fees and other expenses.
8 Portfolio Roundup
Continued From Page 7

ranks of older smokers and the need to adjust marketing
to better reach these consumers. Given that iQOS
is a new product, it’s understandable that marketing
strategies will take some time to develop. Still, the
sudden drop introduces new uncertainty around the
market potential of the heat-not-burn category.
Morningstar Equity Research has long taken a cautious
stance on iQOS. As a result, the first-quarter num-
bers didn’t produce a fair value estimate change for
Philip Morris. The bottom line, in my view, is that
tobacco remains in long-term decline around the world
despite the advent of technologies like iQOS. The key
attributes of Philip Morris are its ability to raise prices as
volume declines while holding capital investment
to a minimum, leading to exceptional cash flow. The
stock now trades at 17 times trailing earnings, down
from about 25 times when the position was trimmed
last year. K

Investment Theses and Latest Thoughts | Michael Hodel, CFA

Alliant Energy LNT Yield (%) Proj. DG Past DG Px/FVE Altria

Altria Group
Group MO
MO Yield
Yield (%)
(%) Proj.
MoatDG Past
Past DG
DG Px/FVE
Px/FVE
Profiled April 2018 3.2 6.0 7.0 1.09 f Profiled
Profiled May
Sept.2017
2016 5.0
3.7 5.0
Wide 8.4
8.3 0.87
1.12 s
Located in Iowa and Wisconsin, Alliant is under two of the nation’s friendliest regulatory Morningstar expects U.S. cigarette volume will decline 3%–4% a year over the next
jurisdictions. With investments in environmental controls and renewable generation decade, with steady price increases allowing for very modest growth in smokable
positioned to receive solid allowed returns on equity, Morningstar expects growth at revenue
X. (80% of the total). Smokeless and wine sales are expected to add a bit of growth
the high end of management’s 5%–7% target over the next several years, fueling as well. Higher prices and a tight focus on costs should help benefit margins, while
dividend growth to match. minimal capital needs enable Altria to pay out a consistently high percentage of earnings.

AmeriGas Partners APU Yield (%) Proj. DG Past DG Px/FVE Amgen AMGN Yield (%) Proj. DG Past DG Px/FVE
Profiled February 2018 9.2 3.0 4.0 0.90 f Profiled December 2017 3.1 8.0 26.2 0.86 d
AmeriGas is the nation’s largest propane distributor, a position that has enabled it to One of the oldest biotech firms around, Amgen has built a diverse stable of older prod-
earn high returns on capital historically. Because it owns the large storage tanks on ucts, new therapies, and pipeline candidates that should produce reasonable top-line
customers’ properties, high switching costs help protect the firm’s customer base and growth over time despite the onslaught of biosimilar competition. With deep manufac-
allow for modest pricing power. Recent warm winters have hurt the balance sheet, turing capabilities, the firm should be a strong player in the biosimilar market as well. A
disappointingly prompting the firm to hold its distribution flat in 2018. strong balance sheet and low dividend payout relative to cash flow are also attractive.

BB&T BBT Yield (%) Proj. DG Past DG Px/FVE BT Group BT Yield (%) Proj. DG Past DG Px/FVE
Profiled January 2018 2.7 6.0 9.5 1.08 y Profiled March 2018 6.1 3.0 15.2 0.63 i
The largest communications provider in the U.K., BT owns the only ubiquitous fixed-line
A conservatively managed, straightforward regional bank, BB&T places a strong emphasis
network in the country and one of four wireless carriers. The combination of
on its dividend payout despite regulation that favors share repurchases. The firm
wireless and fixed-line networks should prove valuable as new wireless technologies
will likely use its well-capitalized balance sheet to buy back stock over the near term,
are deployed. The pension deficit and regulatory pressures are risks that bear
but this activity should bolster dividend growth over time.
watching, however.

Coca-Cola KO Yield (%) Proj. DG Past DG Px/FVE Comcast CMCSA Yield (%) Proj. DG Past DG Px/FVE
Profiled May 2018 3.7 4.0 7.7 0.86 s Profiled April 2018 2.5 8.0 14.2 0.73 i
A dominant global brand, massive distribution capabilities, and cost advantages The proposed Sky acquisition has hit Comcast’s shares recently. Couple that with a
stemming from its position as the world’s largest beverage company should enable 21% dividend increase earlier in 2018, and the shares now yield more than 2% for the
Coke to overcome declining sales of carbonated beverages in developed markets. first time. The firm holds a dominant position in the Internet access market and also
The strength of the U.S. dollar has stunted international growth recently but could just owns solid media assets. A strong balance sheet and low payout ratio should fuel rapid
as easily turn into a tailwind down the road. dividend growth.

Compass Minerals CMP Yield (%) Proj. DG Past DG Px/FVE Dominion Energy D Yield (%) Proj. DG Past DG Px/FVE
Profiled June 2018 4.2 4.0 7.8 0.83 r Profiled June 2018 5.3 7.0 7.5 0.75 f
Consecutive warm winters have left customers with robust inventories of deicing salt, Virginia Electric Power, which benefits from favorable regulatory treatment, contributes
hurting volume and pricing. Still, Compass’ Ontario rock salt mine enjoys a cost about 40% of earnings, providing a solid base from which to invest in other areas.
advantage that is expected to persist for years to come. Compass expanded its fertilizer Dominion has used that opportunity to capitalize on growing gas output in the Marcellus
exposure into Brazil via an acquisition that increased leverage. Declining capital and Utica shale regions, building pipelines and a large liquefied natural gas export facility.
spending has given cash flow a lift, though, allowing debt to start coming down. These well-positioned assets should drive the potential for solid growth for several years.

Data through May 9, 2018. Proj. DG = Michael Hodel’s estimate of average annual dividend growth over the next five years. Past DG = average annual dividend growth over the past five years.
 Morningstar DividendInvestor June 2018 9

Duke Energy DUK Yield (%) Proj. DG Past DG Px/FVE Emerson Electric EMR Yield (%) Proj. DG Past DG Px/FVE
Profiled December 2017 4.6 4.0 2.9 0.89 f Profiled October 2017 2.7 5.0 3.7 0.99 p
The second-largest utility in the U.S., Duke now holds regulated electric and gas With nearly half of sales tied to the oil and gas markets, sales have been under pressure
distribution assets spread throughout the Southeastern U.S., Indiana, Kentucky and recently. Yet returns on capital have been consistently strong. The rebound in crude
Ohio. Investments to benefit the environment and improve reliability should help prices recently has helped lift demand for Emerson’s automation solutions, fueling solid
boost earning potential over the next several years. Morningstar expects dividend growth in sales and bidding activity. Morningstar’s analysts also view the Textron tool
growth will average about 4% annually over this period. acquisition as strategically sound.

Enbridge ENB Yield (%) Proj. DG Past DG Px/FVE Enterprise Products EPD Yield (%) Proj. DG Past DG Px/FVE
Profiled February 2018 6.5 6.0 16.4 0.68 o Profiled July 2017 6.3 4.0 5.7 0.87 o
Enbridge holds an extremely broad set of energy infrastructure assets, including Enterprise has created a tightly integrated network of assets that helps enable it to
pipelines, terminals, and storage facilities. Morningstar's wide moat rating reflects the aggregate multiple energy products from a variety of locations for delivery to a diverse
strength and diversity of the firm's position. Management has aggressive growth range of end markets. This diversity can provide both stability—evident through
investment plans that may prove overly ambitious in light of regulatory and competitive the current downturn in energy markets—and growth opportunities. A conservative,
pressures, but cash flow should still expand nicely over the next few years. simple capital structure, without general partner sponsorships, adds to the appeal.

General Mills GIS Yield (%) Proj. DG Past DG Px/FVE Genuine Parts GPC Yield (%) Proj. DG Past DG Px/FVE
Profiled August 2017 4.6 4.0 9.5 0.72 s Profiled October 2017 3.2 7.0 6.4 0.90 t
With 30% share of U.S. ready-to-eat cereal, 70% share of refrigerated baked goods, The auto-parts business, which contributes more than half of sales, offers countercy-
and 40% share of grain snacks, General Mills should remain a critical partner for clical properties and a strong position against online merchants thanks to deep
retailers, a key attribute when launching new products. The packaged food industry is relationships with professional customers who value service over price. Industrial parts
struggling to grow, however. The firm acquired Blue Buffalo in response, adding distribution (30% of sales) also enjoys the benefits of scale. Minimal debt and a
leverage and halting dividend growth for now. low payout ratio should help provide dividend stability and growth potential over time.

Hanesbrands HBI Yield (%) Proj. DG Past DG Px/FVE Johnson & Johnson JNJ Yield (%) Proj. DG Past DG Px/FVE
Profiled July 2017 3.6 7.0 — 0.57 t Profiled October 2017 2.9 6.0 6.7 0.95 d
Hanesbrands possesses the unique combination of well-known brands, including Hanes J&J holds a strong position in a wide variety of healthcare markets globally, including
and Champion, along with a global manufacturing footprint. These assets should medical devices, over-the-counter products, and several pharmaceutical markets,
enable the firm to respond well to shifting consumer retail habits, continue cutting prompting Morningstar’s view that the firm’s economic moat is one of the widest in the
costs, and find attractive acquisition targets. Acquisition activity has hurt dividend sector. The balance sheet is also about as strong as they come, with $15 billion in
growth recently. net cash. Exceptional free cash flow is expected to continue to easily cover the dividend.

Lamar Advertising LAMR Yield (%) Proj. DG Past DG Px/FVE Magellan Midstream MMP Yield (%) Proj. DG Past DG Px/FVE
Profiled September 2017 5.5 6.0 — NA u Profiled January 2018 5.4 6.0 14.6 0.97 o
While the ad industry is rapidly evolving as marketers turn to measurable online About 85% of revenue is fee based, with inflation-based rate escalators or long-term
platforms, billboards should retain their role as tools for broad-based brand messaging. contracts underpinning much of this business. Magellan’s refined-products pipeline
Acquisitions have pushed debt leverage up, but cash flow in excess of the dividend system is the longest in the U.S., with many routes enjoying near monopoly status.
should allow for debt reduction over the next few quarters, positioning Lamar to make A solid balance sheet and no general partner incentive distribution rights help provide
additional acquisitions should opportunities arise. a solid platform to pay distributions and invest in the business.

Omnicom OMC Yield (%) Proj. DG Past DG Px/FVE Pfizer PFE Yield (%) Proj. DG Past DG Px/FVE
Profiled March 2018 3.2 5.0 13.4 0.87 t Profiled June 2018 3.9 6.0 7.8 0.81 d
One of the four large, global advertising agencies, Omnicom has been beaten up on Pfizer has moved past the worst of its patent cliff and R&D efforts are beginning to
concerns around the rise of digital advertising, among other headwinds. The firm show improved results. With massive scale, the firm has the financial resources to
still possesses deep client relationships and market knowledge that should serve it well. support continued investment in research while funding the distribution of new potential
The shares now offer an attractive yield, with a low payout ratio and solid balance blockbusters. Leverage has ticked higher following recent acquisitions, but free cash
sheet that should cushion the impact of any cyclicality. flow remains strong, providing ample dividend coverage.

Philip Morris International PM Yield (%) Proj. DG Past DG Px/FVE PPL Corp. PPL Yield (%) Proj. DG Past DG Px/FVE
Profiled November 2017 5.2 4.0 5.4 0.79 s Profiled September 2017 5.9 4.0 1.9 0.80 f
With all its sales outside the U.S., Philip Morris is fully exposed to strength in the With more than half of earnings generated in the U.K. the hit to the pound following
dollar, which has hindered earnings growth in recent years despite strong pricing the Brexit vote has diminished PPL’s long-term earnings potential in U.S. dollar
power and manageable declines in cigarette volume. Steady dollar-denominated terms. The vote has no impact on the favorable regulatory environment within the U.K.,
dividend growth against stagnant dollar-denominated free cash flow has resulted in a however, and PPL has ample investment opportunities there and in the U.S. to help
payout ratio north of 90% over the past couple of years. drive opportunities for earnings growth.

r Basic Materials t Consumer Cyclical y Financial Services u Real Estate i Comm. Services o Energy p Industrials a Technology s Consumer Defensive d Healthcare f Utilities
10

Procter & Gamble PG Yield (%) Proj. DG Past DG Px/FVE Realty Income O Yield (%) Proj. DG Past DG Px/FVE
Profiled August 2017 4.0 5.0 4.8 0.74 s Profiled April 2018 5.0 4.0 7.4 0.90 u
Free cash flow and the balance sheet remain strong, helping provide ample support A highly disciplined management team has produced a portfolio of primarily single-
for the dividend, but growth has been tough to come by of late. With management tenant properties that seek to deliver reliable rental income, driving an impressive
having largely completed its restructuring plan, shrinking from 170 to 65 brands, P&G dividend record throughout the real estate cycle. However, the changing retail landscape
now needs to demonstrate that renewed focus can translate into innovation and could reduce demand for space over time and high investor demand has hurt returns
improved sales in lagging categories like skincare and razors. on new investments in recent years.

Southern Company SO Yield (%) Proj. DG Past DG Px/FVE Spectra Energy Partners SEP Yield (%) Proj. DG Past DG Px/FVE
Profiled May 2018 5.5 4.0 3.4 0.86 f Profiled July 2017 9.2 5.0 8.0 0.68 o
Favorable regulation in Georgia and Alabama should enable Southern to drive An extensive network of natural gas pipelines that provide needed market access to
mid-single-digit earnings growth as it invests heavily to phase out or retrofit its coal Marcellus Shale production and strong long-term contracts help ensure stable cash
generating facilities, key initiatives to reduce carbon emissions. However, cost flow while also providing opportunities to invest at high rates of return. A languishing
overruns and regulatory uncertainty around the Kemper County project and Vogtle unit price could tempt parent Enbridge to attempt to acquire the portion of Spectra it
nuclear expansion are risks that bear watching. doesn’t own on the cheap.

United Parcel Service UPS Yield (%) Proj. DG Past DG Px/FVE Ventas VTR Yield (%) Proj. DG Past DG Px/FVE
Profiled February 2018 3.3 6.0 7.8 0.99 p Profiled December 2017 5.9 4.0 4.7 0.82 u
Morningstar considers UPS’ economic moat to be the widest among all freight trans- Healthcare real estate is primed for growth thanks to an aging population, though
portation firms thanks to its sheer scale, handling more packages and reaching numerous investors have taken note, pumping capital into the industry. Ventas
more destinations than any other firm in the industry. Rational pricing can help enable has been at this game a long time, amassing a portfolio of well-positioned buildings,
consistent growth. A strong balance sheet and modest dividend payout relative leases, and relationships that currently generate reliable income. With growth
to free cash flow generation should help provide for stable growth despite cyclicality. opportunities becoming more scarce, management discipline will be paramount.

Verizon Communications VZ Yield (%) Proj. DG Past DG Px/FVE Wells Fargo WFC Yield (%) Proj. DG Past DG Px/FVE
Profiled November 2017 5.1 3.0 2.8 0.89 i Profiled January 2018 2.9 6.0 14.6 0.83 y
Verizon Wireless has held up well in the face of stiff competition from T-Mobile and While the account-opening scandal is a black eye, Wells remains one of the strongest
Sprint, a testament to the reputation for quality it has built over the past 15 years. banks in the U.S., with a massive deposit base, entrenched customer relationships,
Competitive pressure has limited pricing power, though, sharply cutting into growth. and a fairly straightforward, conservative balance sheet. Rising interest rates should
Efforts to expand into new markets through the acquisitions of AOL, Yahoo, and help earnings, though perhaps not to the same extent as many other banks due to
others offer questionable strategic benefits but have come at relatively modest cost. Wells Fargo’s high proportion of fee-based revenue.

Welltower WELL Yield (%) Proj. DG Past DG Px/FVE

Profiled September 2017 6.3 3.0 3.3 0.75 u
Like Ventas, Welltower is positioned to benefit from the aging U.S. population over
the next few years. The decision to shed assets, reducing exposure to troubled Genesis
Healthcare, highlights that the business isn’t without risk. But cash flow remains
strong and reduced leverage should provide capacity to invest as management finds
new opportunities.

Data through May 9, 2018.

Dividend Select Portfolio Performance History by Calendar Year

Cumulative
Period 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 YTD 2018 Annualized

MDI Total Return 2.2 21.9 -0.9 -24.2 17.8 20.8 14.6 13.6 25.6 13.3 2.2 13.7 5.0 -8.1 7.9
Value of $100k 102,155 124,560 123,440 93,563 110,217 133,137 152,559 173,316 217,648 246,567 252,006 286,438 300,724 276,253 —
S&P 500 7.1 15.8 5.5 -37.0 26.5 15.1 2.1 16.0 32.4 13.7 1.4 12.0 21.8 1.5 8.6
B/(W) than S&P -5.0 +6.1 -6.4 +12.8 -8.7 +5.7 +12.5 -2.4 -6.8 -0.4 +0.8 +1.7 -16.8 -9.7 -0.7
DJ US Select Div Idx 6.7 19.5 -5.2 -31.0 11.1 18.3 12.4 10.8 29.1 15.4 -1.6 22.0 15.4 -1.6 8.0
B/(W) than DJDVY -4.5 +2.4 +4.3 +6.8 +6.7 +2.5 +2.2 +2.8 -3.5 -2.1 +3.8 -8.3 -10.4 -6.6 0.0

Data as of May 9, 2018. Portfolio inception date: Jan. 7, 2005. Includes all performance data from previous portfolio structures calculated on a time-weighted composite basis according
to guidelines published by the CFA Institute. Returns for 2005 cover Jan. 7 through year end. “Value of $100k” shows cumulative value assuming a $100,000 investment at inception.
B/(W) is the amount by which the Dividend Select portfolio return was better or worse than the S&P 500 or Dow Jones U.S. Select Dividend index in each period. Returns do not reflect
the effects of all taxation, advisory fees, and/or other expenses normally incurred in the management of a portfolio. If such fees and expenses were included, the performance shown
would be lower. Please see pages 22–23 for additional disclosures and comparable performance information that reflects the effect of advisory fees and other expenses.

Research Roundup
Latest Equity Research and Notes | Morningstar Research Services LLC
Amgen AMGN
Star Rating QQQQ
Current Price ($) 169.64
Economic Moat Wide
Uncertainty Rating Medium
Fair Value ($) 198.00
Price/Fair Value 0.86
Dividend ($) 5.28
Yield (%) 3.1
Payout (%) 36
5-Yr Growth (%) 26.2
Coca-Cola KO
Star Rating QQQQ
Current Price ($) 41.78
Economic Moat Wide
Uncertainty Rating Low
Fair Value ($) 48.50
Price/Fair Value 0.86
Dividend ($) 1.56
Yield (%) 3.7
Payout (%) 71
5-Yr Growth (%) 7.7
Enbridge ENB
Star Rating QQQQQ
Current Price ($) 32.11
Economic Moat Wide
Uncertainty Rating Medium
Fair Value ($) 47.00
Price/Fair Value 0.68
Dividend ($) 2.09
Yield (%) 6.5
Payout (%) 105
5-Yr Growth (%) 16.4
Enterprise Products Partners EPD
Star Rating QQQQ
Current Price ($) 26.93
Economic Moat Wide
Uncertainty Rating Low
Fair Value ($) 31.00
Price/Fair Value 0.87
Dividend ($) 1.71
Yield (%) 6.3
Payout (%) 107
5-Yr Growth (%) 5.7
Amgen Undervalued After In-Line 1Q
We’re maintaining our $198 fair value estimate and wide
moat rating for Amgen AMGN following steady first-
quarter results that reflected double-digit growth for
newer franchises but continuing pressure on the three
largest franchises (immunology drug Enbrel down 6%
and supportive-care drugs Neulasta and Aranesp
down 5% and 11%, respectively). We’ve slightly lowered
our U.S. sales forecasts for Kyprolis, Aranesp, Enbrel,
and Repatha, but a lower assumed tax rate and increases
to our assumptions for several other drugs (Prolia,
Vectibix, Nplate, and biosimilar Amjevita) balance the
impact on our valuation. We expect Amgen to
continue to struggle to see significant top-line growth,
given significant biosimilar and branded pressure,
but investors are well aware of the challenges, and the
company has plenty of cash to support acquisitions
to bolster near-term growth.
April 25 | Karen Andersen, CFA
Coca-Cola Starts Year on Strong Note
Wide-moat Coca-Cola’s KO first-quarter results tracked
in line with our full-year outlook, with organic sales
growth around 5% (versus our expectation of 4%) and
gross margin of 64% (matching our expectation). Our
longer-term outlook for mid-single-digit top-line growth
and average gross margin above 65% is intact. An
uptick in concentrate sales drove 80% of underlying
growth, thanks to strong performance in the Europe,
Middle East, and Africa and Asia-Pacific segments. We
aren’t overly concerned about softer-than-expected
price/mix improvement (1% during the quarter, below
our full-year forecast for 2%–3%), as we attribute this
to a shift in geographic mix toward developing markets
rather than an erosion in the pricing power afforded
by Coca-Cola’s substantial brand equity. We don’t antic-
ipate material changes to our $48.50 fair value
estimate and view the shares, which are trading below
our valuation, as attractive.
April 24 | Sonia Vora
Morningstar DividendInvestor June 2018 11
Enbridge Stock Falls but Remains Undervalued
Minnesota Administrative Law Judge Ann O’Reilly
issued a nonbinding recommendation for the Minnesota
Public Utilities Commission to approve Enbridge’s
ENB Line 3 Replacement Project, but with a big caveat.
She recommended that Line 3 follow its existing route,
not the route proposed by Enbridge. While the approval
is seen as a positive step for Enbridge, using the
existing route will face heavy opposition from tribal com-
munities, which could threaten the project, along with
potential increased costs and the temporary shutdown
of Line 3 operations. Enbridge intends to issue
comments on the nonbinding recommendation to argue
for the benefits of the preferred route, including
acting in the benefit of tribal communities and the envi-
ronment. The market reacted negatively to the news,
with the stock down almost 5% early. At this time, we
are maintaining our $47 (CAD 62) fair value estimate
and wide moat rating. We think the market is overreact-
ing to the recommendation and ignoring safeguards
that limit Enbridge’s downside exposure on the project.
April 24 | Joe Gemino, CPA
U.S. Shale Powers Hydrocarbon Volume Surge
Across Enterprise Products’ System in 1Q
Enterprise Products Partners EPD reported very healthy
results in its seasonally strong first quarter, and we’re
updating our fair value estimate to $31 per unit from
$30 after incorporating stronger-than-expected vol-
umes into our model. We continued to believe the units
are quite undervalued, yielding 5.9% on our 2019
distribution estimate.
Investors have shunned the sector, particularly after
the Federal Energy Regulatory Commission proposal in
March, which we don’t see as having a material
impact on Enterprise. They don’t appreciate the ongoing
volume and thus fee opportunities available to Enter-
prise as U.S. hydrocarbons surge, driving up earnings.
We view Enterprise as the best-in-class master
limited partnership, with incentive distribution rights
eliminated years ago and well into the shift toward
self-funding its equity contributions to capital expendi-
tures. We anticipate the partnership will reach a 1.3
coverage ratio on an annual basis in 2019.
April 30 | Stephen Ellis
12
PPL PPL
Star Rating QQQQ
Current Price ($) 27.89
Economic Moat Narrow
Uncertainty Rating Low
Fair Value ($) 35.00
Price/Fair Value 0.80
Dividend ($) 1.64
Yield (%) 5.9
Payout (%) 69
5-Yr Growth (%) 1.9
Southern SO
Star Rating QQQQ
Current Price ($) 43.79
Economic Moat Narrow
Uncertainty Rating Low
Fair Value ($) 51.00
Price/Fair Value 0.86
Dividend ($) 2.40
Yield (%) 5.5
Payout (%) 80
5-Yr Growth (%) 3.4
United Parcel Service UPS
Star Rating QQQ
Current Price ($) 111.40
Economic Moat Wide
Uncertainty Rating Medium
Fair Value ($) 113.00
Price/Fair Value 0.99
Dividend ($) 3.64
Yield (%) 3.3
Payout (%) 47
5-Yr Growth (%) 7.8
Ventas VTR
Star Rating QQQQ
Current Price ($) 53.15
Economic Moat None
Uncertainty Rating High
Fair Value ($) 65.00
Price/Fair Value 0.82
Dividend ($) 3.16
Yield (%) 5.9
Payout (%) 119
5-Yr Growth (%) 4.7
Eliminating U.K. Midperiod Regulatory Review
Good Sign for PPL’s U.K. Operations
We are reaffirming our $35 fair value estimate and nar-
row economic moat rating after PPL PPL reported
first-quarter operating earnings per share of $0.74 com-
pared with $0.62 in the year-ago period. Management
reaffirmed its $2.20–$2.40 ongoing EPS guidance for
2018, 5%–6% earnings growth expectations through
2020, and 4% dividend growth over the same period.
Management’s expectations are consistent with
our forecasts.
U.K. regulator Ofgem recently announced that it is
forgoing a midperiod review of utility requirements for
revenue under RIIO-ED1, the current eight-year price
control period. Ofgem had sought commentary from
various stakeholders on the need for review, and
its action suggests that key stakeholders were satisfied
with the current framework. We view the announce-
ment positively and consider it an encouraging sign that
RIIO-ED2, the regulatory framework beginning in 2023,
will remain constructive.
May 3 | Andrew Bischof, CFA, CPA
Southern Reports Strong 1Q and Partially
Walks Back $7 Billion in Equity Issuances
We are reaffirming our $51 fair value estimate and
narrow moat rating after Southern SO reported strong
first-quarter adjusted earnings per share of $0.88
versus $0.66 in the same period last year and partially
walked back its plan to issue $7 billion of equity over
the next five years. Southern reaffirmed its guidance for
2018 adjusted EPS of $2.80–$2.95 and a long-term
EPS growth rate of 4%–6%. Our estimates for 2018 EPS
of $2.86 and a 4.6% annual growth rate through 2022
are unchanged.
On April 16, Southern announced it would increase its
dividend by $0.08 per share annualized, to $2.40 per
share. The raise was in line with our forecast, and we
expect Southern to increase its dividend by this
amount each year until construction at the Vogtle plant
is complete.
May 2 | Charles Fishman, CFA
UPS’ Domestic Profitability Drops
Despite Solid Demand
UPS UPS increased its first-quarter top line 10% and
expanded earnings per share 17% via a strong
contribution from its international and supply chain seg-
ments. While its largest segment, domestic, increased
revenue 7% from the prior-year period, weather hamper-
ed domestic margins via network disruptions in 10
of 13 weeks in the quarter. Pension expense, rolling out
Saturday service, and work on network projects
not yet generating benefits also increased expenses.
Weather alone reduced domestic EBIT about 10%,
and all in, domestic EBIT dropped 20% year over year.
On the other hand, UPS increased revenue and
operating profit in the international and supply chain
segments by about 15% each. We don’t view the
lower domestic margin as indicative of a permanent
problem; transports operate outdoors, and expansion
of service days and terminals is prudent to handle the
high-quality challenge of growing demand. We
maintain our wide moat rating and don’t expect to make
material changes to our fair value estimate due to
the quarter’s results.
April 26 | Keith Schoonmaker, CFA
Ventas Beats Expectations
Ventas VTR beat our expectations for the first quarter
with stronger-than-expected performance from the
operating senior housing portfolio. We are maintaining
our $65 fair value estimate and no-moat rating, as
the quarter doesn’t change our long-term outlook for the
sector. Senior housing occupancies dropped only 160
basis points, resulting in 0.7% same-store net operating
income growth from senior housing, significantly
above management’s full-year guidance of a 1.0%–4.0%
decline. We believe Ventas is being overly conserva-
tive by not raising guidance for the sector, but we believe
it will boost its outlook with another quarter under its
belt. The strong results led Ventas to report normalized
funds from operations of $1.05 per share, beating our
estimate by $0.02. K
April 27 | Kevin Brown
All Morningstar Stock Analyst Notes were written by
the analysts of Morningstar, Inc. or its affiliates.

Compass Minerals CMP
Portfolio Focus | Seth Goldstein, CFA, Morningstar Research Services LLC
Compass Minerals CMP holds an enviable portfolio of
cost-advantaged assets. Its Goderich rock salt mine in
Ontario benefits from unique geology, and with access
Compass Minerals CMP to a deep-water port, it can deliver deicing salt to
Star Rating QQQQ customers at a lower cost than competitors. Also, the
Current Price ($) 69.00
company controls one of only three naturally occur-
Economic Moat Wide
Uncertainty Rating High ring brine sources that produces sulfate of potash, a
Fair Value ($) 83.00 specialty fertilizer priced at a premium to standard
Price/Fair Value 0.83 potash. These operations at the Great Salt Lake in Utah
Dividend ($) 2.88
Yield (%) 4.2
can produce sulfate of potash at a significantly
Payout (%) 96 lower cost than producers that use a chemical process.
5-Yr Growth (%) 7.8
Compass reported encouraging first-quarter results on
May 1, as strong highway deicing salt volume partially
offset increased expenses in the salt segment related
to the September 2017 Goderich mine collapse. In the
earnings release, management noted currently favor-
able conditions in the deicing salt market as the 2018
bid season kicks off.
Management’s market commentary mirrors our thesis
that a harsh 2017–18 winter will lead to higher
deicing salt prices in the upcoming bid season as higher
demand will come from local governments that
need to replenish inventories. Higher prices from the
Compass Minerals: Stock Price and Dividend Rate ($)
100
100 2.95
Dividend
75
75 2.35
Stock
50
50 1.75
25
25 1.15
0
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 18
This portfolio focus article is based on content originally published by Morningstar, Inc. on May 2, 2018.
Log into mdi.morningstar.com to see the full analysis. Sources: Morningstar, Inc. and company reports.
Data through May 9, 2018. Ratings, rankings, categorizations, and fair value estimates are based on
the analysis and estimates of analysts of Morningstar, Inc. or its affiliates.
Morningstar DividendInvestor June 2018 13
2018 deicing salt bid season should provide a catalyst
to boost the share price. With our outlook essentially
unchanged, we have increased our fair value estimate
to $83 per share from $82 to account for the time
value of money. We continue to view Compass Minerals’
shares as undervalued, trading at a 15% discount to
our fair value estimate.
In the earnings announcement, management reported
the successful installation of salt refiners at the
Goderich mine to deal with higher-than-normal impurity
levels. Compass has also installed continuous miners
at the Goderich mine and instituted a back-office cost-
saving program. We maintain our outlook that lower
salt segment unit costs will help drive profit growth.
With the company’s cost-advantaged salt production
intact, we maintain our wide moat rating.
On the downside, Compass is dealing with a strike
at the Goderich mine, announced April 27. If this is not
quickly resolved, the company has contingency plans
that include hiring contract workers and using mine man-
agement to run the continuous miners, which require
fewer workers to extract salt from the mine. We do not
expect the company’s volume to fall, but a prolonged
strike would probably cap any volume upside in 2018.
Income Focus | David Harrell
When we last featured Compass (in the June 2017
issue), its annual dividend rate was $2.88 and its forward
yield was 4.2%. A year later, both of those numbers
are unchanged. Meanwhile, despite a recent $1 bump,
Morningstar’s fair value estimate for Compass has
declined to $83 per share from $88, though the company
remains undervalued by that measure. The question
for income-oriented investors is when dividend growth
will return. Management has stated its commitment
to increasing the dividend, and the upcoming bid season
could result in higher deicing salt prices. Still, it
appears that Compass will need to reduce its leverage
over the next few years and realize the promised
lower mining costs as a result of investments in the
Goderich mine. Otherwise, the prospects for near-
term dividend increases are modest, in our opinion. K
14
Dominion Energy D
Portfolio Focus | Charles Fishman, CFA, Morningstar Research Services LLC
Dominion Energy D changed its name from Dominion
Resources in 2017. More important for investors, the
company has also made a strategic pivot. Since 2010, it
Dominion Energy D has focused on developing new wide-moat projects
Star Rating QQQQQ with conservative strategies, exited the exploration and
Current Price ($) 62.67
production business, sold or retired no-moat mer-
Economic Moat Wide
Uncertainty Rating Low chant energy plants, and made significant investments
Fair Value ($) 84.00 in moaty utility infrastructure.
Price/Fair Value 0.75
Dividend ($) 3.34
Yield (%) 5.3
We are reaffirming our $84 fair value estimate and
Payout (%) 77 wide moat and stable moat trend ratings after Dominion
5-Yr Growth (%) 7.5 reported strong first-quarter results and updated
investors on its financing plans after a surprise Federal
Energy Regulatory Commission notice on March 15
related to pipelines’ tax recapture. We are also reaffirm-
ing our 2018 earnings per share estimate of $4.05 after
Dominion raised its EPS guidance above the midpoint
of its previous $3.80-$4.25 range.
With a 40%-plus decline in Dominion Energy Midstream
Partners’ DM unit price since the FERC announce-
ment, we’re not surprised that Dominion will delay its
planned Cove Point drop-down. Dominion now plans
to supplement its cash needs with a recently completed
forward equity sale of approximately $1.5 billion and
Dominion Energy: Stock Price and Dividend Rate ($)
85.0
85.0 3.5
Dividend
67.5
67.5 2.9
Stock
50.0
50.0 2.3
32.5
32.5 1.7
15.0
1998 2000 2002 2004 2006 2008 2010 2012 2014 2016
This portfolio focus article is based on content originally published by Morningstar, Inc. on April 27, 2018.
Log into mdi.morningstar.com to see the full analysis. Sources: Morningstar, Inc. and company reports.
Data through May 9, 2018. Ratings, rankings, categorizations, and fair value estimates are based on the
analysis and estimates of analysts of Morningstar, Inc. or its affiliates.
by placing an estimated $3 billion of nonrecourse debt
at Cove Point this year. These moves combined with
Dominion’s plan to sell roughly $1.5 billion of noncore
assets, ongoing distributions from DM, and the $1.3
billion Questar Pipeline drop-down in late 2016 should
give Dominion $7.5 billion of cash to reduce parent
debt by 2020.
We think the market has overly punished Dominion’s
stock during the past month. DM has lost about $1.5
billion of market value since the FERC notice, of which
Dominion’s share is roughly 50%. We estimate com-
bining this with the modest reduction in the value of
Dominion’s preferred position and the elimination
of suspension of its incentive distribution rights has
resulted in a $1 billion reduction of value related to
Dominion’s stake in DM. Yet Dominion has lost more
than $5 billion of market value since mid-March.
Technical factors appear to be causing the weakness.
There are too many Dominion shares hitting the
market and, in general, too much utility equity following
the need to shore up balance sheets due to tax
reform. However, we continue to believe that Dominion’s
underlying fundamentals are intact and support our
fair value estimate.
Income Focus | David Harrell
So far, so good: Last year, Dominion’s management said
its goal was to “increase dividends more than 8%
annually” beginning in 2018. For its first payout of 2018,
Dominion raised its quarterly dividend from $0.77 to
$0.835, an 8.4% increase. This was despite an antici-
pated decrease in operating earnings per share. That
raise, coupled with weakness in Dominion’s share price
(which is down nearly 20% over the past year), has
pushed the forward yield to 5.3%.
Dominion is targeting a 10% dividend increase in 2019,
followed by a raise of 6%–10% in 2020. Morningstar
analysts believe annual dividend growth will decline to
5% after that, and DividendInvestor projects annual-
ized dividend growth of 7% over the next five years. Also
on the horizon is Dominion’s bid for Scana SCG. If
this is successful under the proposed terms, Morningstar
believes the purchase could increase earnings. K

Pfizer PFE
Portfolio Focus | Damien Conover, CFA, Morningstar Research Services LLC
We believe Pfizer’s PFE foundation is solid, based on
strong cash flows generated from a basket of diverse
drugs. The company’s large size confers significant
Pfizer PFE competitive advantages in developing new drugs. This
Star Rating QQQQ unmatched heft, combined with a broad portfolio of
Current Price ($) 35.17
patent-protected drugs, has helped Pfizer build a wide
Economic Moat Wide
Uncertainty Rating Low economic moat around its business.
Fair Value ($) 43.50
Price/Fair Value 0.81 Pfizer’s size gives the company one of the largest
Dividend ($) 1.36
Yield (%) 3.9
economies of scale in the pharmaceutical industry. In
Payout (%) 44 a business where drug development needs a lot of
5-Yr Growth (%) 7.8 shots on goal to be successful, Pfizer has the financial
resources and the established research power to
support the development of more new drugs. After many
years of struggling to bring out important new drugs,
Pfizer is now launching several potential blockbusters
in cancer, heart disease, and immunology.
Pfizer’s vast financial resources support a leading
salesforce. The company’s commitment to postapproval
studies provides its salespeople with an armamen-
tarium of data for their marketing campaigns. Further,
Pfizer’s leading salesforces in emerging countries
position the company to benefit from the dramatically
Pfizer: Stock Price and Dividend Rate ($)
50
50 1.4
Dividend
40
40 1.1
Stock
30
30 0.8
20
20 0.5
10
1998 2000 2002 2004 2006 2008 2010 2012 2014 2016
This portfolio focus article is based on content originally published by Morningstar, Inc. on May 7, 2018.
Log into mdi.morningstar.com to see the full analysis. Sources: Morningstar, Inc. and company reports.
Data through May 9, 2018. Ratings, rankings, categorizations, and fair value estimates are based on the
analysis and estimates of analysts of Morningstar, Inc. or its affiliates.
Morningstar DividendInvestor June 2018 15
increasing wealth in nations such as Brazil, Russia,
India, China, and Turkey.
While entrenched as an industry leader, Pfizer faces
challenges in the near term. The loss of patent protec-
tion on several drugs will likely weigh on future
growth. In particular, the 2017 patent loss on Viagra
and the 2019–20 U.S. patent losses on Lyrica could
slow long-term growth.
However, we believe Pfizer’s operations can withstand
the upcoming generic competition. The 2009 acquisition
of Wyeth helps insulate Pfizer from any one patent
loss. In addition, following the merger, Pfizer has a much
stronger position in vaccines with meningitis vaccine
Prevnar 13. Vaccines tend to be more resistant to generic
competition because of their manufacturing complexity
and relatively lower prices.
Income Focus | David Harrell
After halving its dividend rate in 2009 following the
Wyeth acquisition, Pfizer has taken a steady approach
to restoring its dividend: As it has for each of the past
nine years, Pfizer increased its quarterly dividend rate
by $0.02 for its first payout of 2018, a 6.25% raise.
Its annualized dividend growth for the past five years is
7.8%. (While the amount of the annual raises is con-
sistent, on a percentage basis it represents a smaller
increase each year.) Pfizer’s payout ratio has ticked
up in recent years, exceeding 100% in 2016, but the
dividend remains well covered by free cash flow.
With a current yield of 3.9%, Pfizer is a middle-of-
the-pack payer in the Dividend Select portfolios, though
its yield exceeds that of the portfolios’ two other
pharmaceutical holdings, Amgen AMGN and Johnson
& Johnson JNJ. Management remains committed
to the dividend—it was named as the first priority in
response to a question about capital allocation
in the May 1 earnings call—and we estimate future
dividend growth at 6% over the next five years. K
16

Kraft Heinz KHC
Dividend Drill | Erin Lash, CFA, Morningstar Research Services LLC
Kraft Heinz KHC
Star Rating QQQQ
Current Price ($) 58.48
Economic Moat Narrow
Uncertainty Rating Medium
Fair Value ($) 70.00
Price/Fair Value 0.84
Dividend ($) 2.50
Yield (%) 4.3
Payout (%) 65
5-Yr Growth (%) —
Kraft Heinz: Stock Price and Dividend Rate ($)
95
95
85
85
75
75
65
65
For nearly three years, Kraft Heinz’s KHC strategy has
centered on driving out inefficiencies by reducing
its workforce, rationalizing its North American manu-
facturing network, and enhancing its supply chain.
The tangible gains from these efforts are undeniable:
The company now boasts operating margins in the
high 20s, a level that towers above the mid- to high teens
margins generated by its packaged food peers.
However, its sales have languished, falling an average
of 1% on an organic basis since fiscal 2015. We think
the missing piece of the puzzle is effective brand spend-
ing, which has amounted to just 2%–3% of sales
annually at Kraft Heinz versus mid- to high-single-digit
levels at peers.
Kraft Heinz’s top line again deteriorated to start 2018.
Organic sales eroded 1.5% as a 2.5% retreat in volume
was only partially offset by a 1% uptick in price. This
was a particularly weak outcome, given that it came on
top of a 3% decline a year ago. These challenging
conditions have been especially pronounced on the
company’s home turf, which provides around 70%
of total sales; U.S. sales fell 3.3%, driven by a 4%-plus
erosion in volume concentrated in the nut, cold cut,
and frozen potato categories.
2.55
Dividend
2.45
2.35
2.25
To withstand the headwinds from the intense compet-
itive landscape and bolster longer-term top-line
performance, Kraft Heinz will need to elevate the invest-
ment behind its brands, in our opinion. Despite the
near-term profit hit, we think effective spending on
research and development and marketing could also
enhance the stickiness of Kraft Heinz’s retailer relation-
ships and subsequently reinforce an aspect of the
company’s intangible asset economic moat source. Our
thinking aligns with management’s rhetoric, providing
credence to our belief that margin gains could stagnate
as Kraft Heinz increases brand support.
Through the first three months of 2018, results are
generally tracking in line with our expectations, and we
don’t expect to make any material changes to our
outlook (nearly 3% annual sales growth, with about half
of the growth resulting from higher volume and the
remainder from increased prices, and operating margins
hovering in the mid-20s) or our $70 fair value estimate.
Following a 30%-plus contraction in its share price over
the past year, we view this narrow-moat company as
attractive at current levels.
Income Focus | David Harrell
Formed by the merger of Kraft Foods Group and H.J.
Heinz, Kraft Heinz commenced trading July 6, 2015,
and paid its first dividend as a combined company at
the end of that month. Since then, Kraft Heinz has
increased its payout three times, raising the dividend
rate by 13.6%, which works out to just 4.6% on an
annualized basis.
Meanwhile, share price contraction over the past year
has helped to push the forward yield to 4.3%. That
yield makes Kraft Heinz the second-best payer among
the 15 consumer defensive stocks on the Income
Bellwethers watchlist, lagging only British American
Tobacco BTI. However, given Morningstar’s forecast
for relatively modest sales and earnings growth over
the next five years, it seems likely that near-term
dividend growth will also be somewhat modest. K

Stock
55
2015 2016 2017 2018

This Dividend Drill article is based on content originally published by Morningstar, Inc. on May 3, 2018,
and March 21, 2018. Log into mdi.morningstar.com to see the full analysis. Sources: Morningstar, Inc.
and company reports. Data through May 9, 2018. Ratings, rankings, categorizations, and fair value esti-
mates are based on the analysis and estimates of analysts of Morningstar, Inc. or its affiliates.

PepsiCo PEP
Dividend Drill | Sonia Vora, Morningstar Research Services LLC
PepsiCo’s PEP leading portfolio of beverage and snack
brands has carved out a wide economic moat for the
company, ensuring excess returns on invested capital
PepsiCo PEP over the long run. The portfolio has 22 brands that
Star Rating QQQQ generate over $1 billion in revenue annually, leading
Current Price ($) 96.16
to sticky relationships with distributors and retailers
Economic Moat Wide
Uncertainty Rating Low that depend on leading brands to generate store traffic.
Fair Value ($) 123.00
Price/Fair Value 0.78 We believe Pepsi and Coca-Cola KO will continue
Dividend ($) 3.71
Yield (%) 3.9
dominating the domestic nonalcoholic beverage
Payout (%) 56 market. Each has a share in the low 20s, more than
5-Yr Growth (%) 8.3 double that of next-closest competitor Dr Pepper
Snapple. Pepsi’s and Coca-Cola’s entrenched retail
relationships and economies of scale create power-
ful barriers to entry. Moreover, we expect rational pricing
relationships between the two to persist over the
long run, leading to gains from price and product mix.
Although Coca-Cola’s carbonated soft drinks enjoy
greater share abroad, we believe Pepsi’s snack portfolio
is well positioned for international gains. Pepsi also
has established agreements to distribute brands such
as Starbucks, Sabra, and Rockstar Energy, strength-
ening its retailer relationships.
We anticipate growth will be fueled by Pepsi’s noncar-
bonated beverage and snack businesses, which should
PepsiCo: Stock Price and Dividend Rate ($)
125
125 3.80
Dividend
100
100 2.95
Stock
75
75 2.10
50
50 1.25
25
1998 2000 2002 2004 2006 2008 2010 2012 2014 2016
This Dividend Drill article is based on content originally published by Morningstar, Inc. on May 8, 2018.
Log into mdi.morningstar.com to see the full analysis. Sources: Morningstar, Inc. and company reports.
Data through May 9, 2018. Ratings, rankings, categorizations, and fair value estimates are based on the
analysis and estimates of analysts of Morningstar, Inc. or its affiliates.
Morningstar DividendInvestor June 2018 17
enable the company to offset secular declines in the
consumption of carbonated soft drinks (less than one
fourth of overall sales) in developed markets. We
appreciate the company’s focus on “guilt-free” products
(roughly half of sales), which align with consumer
trends. We think sustained brand-related investments,
with combined expenditures on advertising and
research and development remaining above 7% of sales
over our forecast, will allow Pepsi to develop and
market innovative new products, bolstering the intan-
gible asset source of its wide moat. Efforts to drive
efficiency gains, targeting $1 billion in savings annually,
stand to enhance its margins and free up funds to
support its product set.
Pepsi took control of its two largest bottlers in 2010,
consolidating around 80% of its North American bever-
age system, and we expect these bottling operations
to remain integrated with the company. We think this
dynamic allows for increased control over packaging
and distribution and deeper integration between the
snack and beverage businesses.
Income Focus | David Harrell
Pepsi has an impressive record of annual dividend
increases (46 years in a row), but over the past five years,
its yield has mostly lagged that of rival and Dividend
Select Portfolio holding Coca-Cola. However, with its
latest dividend declaration, Pepsi raised its quarterly
payout more than 15%. That in combination with a nearly
20% year-to-date drop in its share price has pushed
Pepsi’s forward yield to 3.9%, ahead of Coke’s 3.7%.
Pepsi also wins the “Coke vs. Pepsi Dividend Growth
Challenge,” with annualized dividend growth of 8.3%
for the past five years versus 7.7% for Coke.
While Pepsi also increased its dividend by 15% in 2014,
its latest raise more than doubles its dividend hikes
in each of the three previous years. When asked about
the dividend on an earnings call, management said it
expects to maintain a slightly higher payout ratio going
forward. However, the new dividend rate is well
covered by consensus analyst earnings estimates for
2018 and 2019. K
 18

Income Bellwethers Watchlist

Dividend Watchlist

U.S. Stocks Star Rating Moat Uncertainty Fair Value Price Px/FV Dividend Yield Past DG Sector
AbbVie ABBV QQQ Narrow Medium 99.00 ] 101.18 1.02 3.84 3.8 — d
Air Products & Chemicals APD QQQ Narrow Medium 160.00 164.89 1.03 4.40 2.7 8.2 r
American Electric Power AEP QQQ Narrow Low 68.00 66.27 0.97 2.48 3.7 4.9 f
P Andeavor Logistics LP ANDX QQQ Narrow Medium 43.00 45.35 1.05 4.06 ] 9.0 18.9 o
AT&T T QQQQ Narrow Medium 40.00 31.40 0.79 2.00 6.4 2.2 i
Bristol-Myers Squibb BMY QQQQ Wide Medium 64.00 51.09 0.80 1.60 3.1 2.8 d
CA Inc. CA QQQ Narrow Medium 35.00 ] 34.40 0.98 1.02 3.0 0.4 a
Campbell Soup CPB QQQQ Wide Medium 52.00 41.36 0.80 1.40 3.4 3.8 s
Cardinal Health CAH QQQQQ Wide Medium 82.00 [ 52.76 0.64 1.85 3.5 15.4 d
Carnival CCL QQQ Narrow High 70.00 63.95 0.91 2.00 ] 3.1 9.9 t
CenterPoint Energy CNP QQQ Narrow Medium 28.00 26.27 0.94 1.11 4.2 5.7 f
Chevron CVX QQQ Narrow Medium 121.00 128.72 1.06 4.48 3.5 4.2 o
Cisco Systems CSCO QQ Narrow Medium 40.00 46.04 1.15 1.32 2.9 31.5 a
Clorox CLX QQQQ Wide Low 136.00 ] 120.33 0.88 3.84 3.2 5.9 s
CMS Energy CMS QQ Narrow Low 40.00 44.73 1.12 1.43 3.2 6.7 f
Tapestry TPR QQQ Narrow High 45.00 [ 45.40 1.01 1.35 3.0 6.7 t
R Crown Castle CCI QQ None High 77.00 103.79 1.35 4.20 4.0 — u
Cummins CMI QQQ Narrow High 164.00 146.52 0.89 4.32 2.9 18.5 p
CVS Health CVS QQQQQ Wide Medium 99.00 61.21 0.62 2.00 3.3 25.2 d
DowDupont DWDP QQQ Narrow High 64.00 ] 66.03 1.03 1.52 2.3 7.8 r
Dr Pepper Snapple Group DPS QQQ Wide Low 122.00 119.92 0.98 2.32 1.9 11.3 s
DTE Energy Holding DTE QQQ Narrow Medium 97.00 ] 100.24 1.03 3.53 3.5 6.8 f
Eaton ETN QQQ Narrow Medium 78.00 ] 75.66 0.97 2.64 3.5 9.6 p
Edison International EIX QQQQ Narrow Low 66.00 60.42 0.92 2.42 4.0 11.2 f
Eli Lilly LLY QQQQ Wide Medium 96.00 ] 79.27 0.83 2.25 2.8 1.2 d
P Enbridge Energy Partners LP EEP QQQQ Narrow High 13.00 9.31 0.72 1.40 15.0 -5.4 o
Exelon EXC QQQ Narrow Medium 37.00 ] 39.97 1.08 1.38 3.5 -9.0 f
Exxon Mobil XOM QQQQ Narrow Low 85.00 79.93 0.94 3.28 ] 4.1 7.0 o
Fastenal FAST QQQ Wide Medium 53.00 ] 51.51 0.97 1.48 2.9 11.6 p
First Energy FE QQQQ Narrow Low 40.00 33.52 0.84 1.44 4.3 -8.1 f
Garmin GRMN QQQ Narrow High 61.00 ] 59.41 0.97 2.12 3.6 3.1 a
Gilead Sciences GILD QQQQ Wide Medium 82.00 [ 65.69 0.80 2.28 3.5 — d
Harley-Davidson HOG QQQQ Wide High 49.00 ] 40.10 0.82 1.48 3.7 18.7 t
Hasbro HAS QQQQ Narrow Medium 95.00 [ 86.68 0.91 2.52 2.9 5.0 t
R HCP HCP QQQ None High 25.00 [ 23.88 0.96 1.48 6.2 -5.8 u
The Hershey Co HSY QQQQ Wide Medium 116.00 [ 92.61 0.80 2.62 2.8 10.3 s
HollyFrontier HFC QQ Narrow High 49.00 67.97 1.39 1.32 1.9 17.1 o
Huntington Bancshares HBAN QQQ Narrow Medium 15.00 15.09 1.01 0.44 2.9 17.0 y
Intel INTC QQQQ Wide Medium 62.00 ] 54.34 0.88 1.20 2.2 4.4 a
International Business Machines IBM QQQ Narrow High 168.00 142.61 0.85 6.28 ] 4.4 12.3 a

] Rating Increase [ Rating Decrease C  New Addition UR 5 Under Review 5 Master Limited Partnership 5 REIT
Past DG = average annual dividend growth over the past five years.
r Basic Materials t Consumer Cyclical y Financial Services u Real Estate i Comm. Services o Energy p Industrials a Technology s Consumer Defensive d Healthcare f Utilities
 Morningstar DividendInvestor June 2018 19

U.S. Stocks Star Rating Moat Uncertainty Fair Value Price Px/FV Dividend Yield Past DG Sector
Interpublic Group IPG QQQ Narrow Medium 25.00 23.72 0.95 0.84 3.5 24.6 t
Invesco IVZ QQQQ Narrow Medium 40.00 [ 27.98 0.70 1.20 ] 4.3 12.4 y
R Iron Mountain IRM QQQ Narrow Medium 37.00 33.42 0.90 2.35 7.0 16.1 p
JM Smucker SJM QQQQ Narrow Medium 135.00 ] 113.79 0.84 3.12 2.7 9.2 s
Johnson Controls JCI QQQQ Narrow High 53.00 36.27 0.68 1.04 2.9 6.8 p
Kellogg K QQQQ Narrow Medium 77.00 60.33 0.78 2.16 3.6 4.0 s
Kimberly-Clark KMB QQQQ Narrow Medium 118.00 103.06 0.87 4.00 3.9 5.6 s
KLA-Tencor KLAC QQQQ Wide High 125.00 109.17 0.87 3.00 2.7 8.9 a
Kraft Heinz KHC QQQQ Narrow Medium 70.00 58.48 0.84 2.50 4.3 — s
L Brands LB QQQQQ Wide Medium 65.00 [ 34.12 0.52 2.40 7.0 19.1 t
Lockheed Martin LMT QQQ Wide Medium 318.00 ] 326.12 1.03 8.00 2.5 12.4 p
Marathon Petroleum MPC QQQ Narrow High 87.00 ] 77.11 0.89 1.84 2.4 20.4 o
Maxim Integrated Products MXIM QQQ Wide High 50.00 57.33 1.15 1.68 2.9 8.5 a
McDonald's MCD QQQQ Wide Medium 190.00 164.24 0.86 4.04 2.5 5.9 t
Merck MRK QQQQ Wide Low 65.00 57.95 0.89 1.92 3.3 2.3 d
NextEra Energy NEE QQ Narrow Low 150.00 158.29 1.06 4.44 2.8 10.4 f
NiSource NI QQQ Narrow Low 26.00 ] 24.65 0.95 0.78 3.2 -5.7 f
Nordstrom JWN QQQ Narrow High 53.00 49.27 0.93 1.48 3.0 6.5 t
Paychex PAYX QQ Wide Medium 52.00 62.21 1.20 2.24 ] 3.6 7.7 p
PepsiCo PEP QQQQ Wide Low 123.00 96.16 0.78 3.71 ] 3.9 8.3 s
Phillips 66 PSX QQQ Narrow High 102.00 117.50 1.15 2.80 2.4 43.4 o
P Phillips 66 Partners LP PSXP QQQ Narrow High 55.00 49.53 0.90 2.86 ] 5.8 — o
Pinnacle West Capital PNW QQQ Narrow Low 80.00 77.41 0.97 2.78 3.6 4.6 f
P Plains All American Pipeline LP PAA QQQ Wide High 27.00 24.31 0.90 1.20 4.9 -1.6 o
Plains GP Holdings PAGP QQQ Wide High 27.00 24.86 0.92 1.20 4.8 — o
Praxair PX QQQ Wide Medium 140.00 155.51 1.11 3.30 2.1 7.4 r
Public Service Enterprise Group PEG QQ Narrow Medium 43.00 ] 50.57 1.18 1.80 3.6 3.9 f
Qualcomm QCOM QQQQ Narrow High 75.00 53.17 0.71 2.48 ] 4.7 18.8 a
Sabre SABR QQQQ Narrow Medium 27.00 ] 22.97 0.85 0.56 2.4 — a
SCANA SCG QQQQQ Narrow Medium 57.00 [ 35.13 0.62 2.45 7.0 4.4 f
Schlumberger SLB QQQ Narrow High 68.00 70.88 1.04 2.00 2.8 12.7 o
Sempra Energy SRE QQQ Narrow Low 114.00 105.14 0.92 3.58 3.4 6.5 f
Sysco SYY QQ Narrow Medium 55.00 ] 63.50 1.15 1.44 2.3 4.0 s
T. Rowe Price Group TROW QQQ Wide Medium 115.00 116.66 1.01 2.80 2.4 10.9 y
P Tallgrass Energy Partners TEP QQQQ Narrow Medium 51.00 42.32 0.83 3.90 9.2 — o
Texas Instruments TXN QQQ Wide Medium 97.00 107.54 1.11 2.48 2.3 24.1 a
Valero Energy VLO QQ Narrow High 95.00 114.82 1.21 3.20 2.8 33.9 o
Valero Energy Partners LP VLP QQQ Narrow High 45.00 [ 38.92 0.86 2.11 ] 5.4 — o
VF Corp VFC QQQ Wide Medium 73.00 78.13 1.07 1.84 2.4 17.8 t
Wal-Mart Stores WMT QQQQ Wide Low 91.00 83.06 0.91 2.08 2.5 5.1 s
WEC Energy Group WEC QQQ Narrow Low 61.00 61.44 1.01 2.21 3.6 11.6 f
Westar Energy WR QQ Narrow Low 48.00 ] 52.96 1.10 1.60 3.0 3.9 f
Williams Companies WMB QQQ Narrow Medium 28.50 26.52 0.93 1.36 5.1 0.1 o
Williams Partners WPZ QQQ Narrow Medium 39.50 36.80 0.93 2.46 ] 6.7 11.3 o
Xcel Energy XEL QQ Narrow Low 40.00 44.81 1.12 1.52 3.4 6.1 f

] Rating Increase [ Rating Decrease C  New Addition UR 5 Under Review 5 Master Limited Partnership 5 REIT
Past DG = average annual dividend growth over the past five years.
r Basic Materials t Consumer Cyclical y Financial Services u Real Estate i Comm. Services o Energy p Industrials a Technology s Consumer Defensive d Healthcare f Utilities
20

International Stocks Star Rating Moat Uncertainty Fair Value Price Px/FV Dividend Yield Past DG Sector
Anheuser-Busch Inbev ADR BUD QQQQQ Wide Low 126.00 97.93 0.78 4.05 4.1 20.8 s
AstraZeneca ADR AZN QQ Wide Medium 30.00 36.16 1.21 1.40 3.9 -0.4 d
British American Tobacco ADR BTI QQQQQ Wide Low 67.00 52.74 0.79 2.71 5.1 10.6 s
China Mobile CHL QQQQ Narrow Medium 65.00 48.91 0.75 1.83 3.7 -2.6 i
GlaxoSmithKline ADR GSK QQQQ Wide Medium 49.00 40.22 0.82 2.24 5.6 1.8 d
HSBC Holdings ADR HSBC QQQ Narrow Medium 46.30 49.54 1.07 2.55 5.1 4.5 y
Nestle ADR NSRGY QQQQ Wide Low 82.00 [ 77.09 0.94 2.53 3.3 3.7 s
Novartis ADR NVS QQQQ Wide Low 87.00 77.09 0.89 2.98 3.9 1.8 d
Roche Holding ADR RHHBY QQQQQ Wide Low 41.00 [ 28.09 0.69 1.08 3.9 4.3 d
Royal Bank of Canada RY QQQ Wide Medium 84.00 77.33 0.92 2.93 3.8 8.8 y
Sanofi ADR SNY QQQQ Wide Medium 54.00 37.63 0.70 1.86 ] 4.9 2.9 d
Telefonica ADR TEF QQQQ Narrow High 16.00 9.88 0.62 0.49 5.0 -6.3 i
Unilever PLC ADR UL QQQQ Wide Low 64.00 55.54 0.87 1.92 ] 3.4 7.8 s
Vodafone Group ADR VOD QQQQ Narrow High 35.50 28.80 0.81 1.73 6.0 -12.8 i
Westpac Banking ADR WBK QQQQ Wide Medium 26.00 22.16 0.85 1.41 6.4 2.1 y

Source: Morningstar, Inc. Data is as of May 9, 2018. Ratings, rankings, categorizations, and fair value estimates are based on the analysis and estimates of analysts of Morningstar,
Inc. or its affiliates. ©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. Reproduction, transcription, or other use, by any means, in whole or in part, without the prior written consent of Morningstar,
is prohibited.

Payouts in Peril
Company/Ticker Economic Moat Fair Value Uncertainty Dividend Yield (%) Payout Ratio
BP ADR BP None High 5.13 82
CenturyLink None Very High 11.97 313
CF Industries CF None Very High 3.10 102
Energy Transfer Equity ETE None Medium 7.26 75
Energy Transfer Partners ETP None Medium 13.70 142
Guess? Inc GES None High 3.82 95
Helmerich & Payne HP None Very High 4.11 NA
Las Vegas Sands LVS Narrow High 3.85 82
Seagate Technology STX None Very High 4.40 49

Data as of May 9, 2018. Sources: Reuters, Morningstar.

About Income Bellwethers
The Income Bellwethers research
list monitors the universe of
stocks with large dividends that
are traded on U.S. exchanges
and covered by equity research
analysts of Morningstar, Inc. or
its affiliates. Basic qualifications
include a narrow or wide
economic moat rating; a fair
value uncertainty rating of
low, medium, or high; and
current dividend yields of 2.5%
or more. Stocks held in the
Dividend Select portfolios or
shown in the Payouts in
Peril list are excluded. The list
is then composed of the 85
largest domestic stocks and 15
largest ADRs, ranked in terms
of total dividends paid in terms
of dollars, and it is updated
to reflect new data on at least
a quarterly basis. Income
Bellwethers is meant to present
ratings and other relevant
data for stocks that are widely
held by income investors; it
should not be regarded as a list
of potential buys.
About Payouts in Peril
The Payouts in Peril list high-
lights stocks that the editor
of DividendInvestor judges to be
facing elevated risk of future
dividend cuts due to above-aver-
age cyclicality, high financial
leverage, and/or excessively
large current payouts. While
it does not predict a dividend cut
in any specific timeframe, these
stocks dividends’ may not be
reliable over the course of
a market cycle. At the industry
level, alternative asset man-
agers, mortgage REITs, and oil
refiners are also considered
to be incompatible with the
DividendInvestor strategy.
 Morningstar DividendInvestor June 2018 21

Visualizing the Income Bellwethers Watchlist

r Basic Materials
Companies 3
Avg. P/FV 1.06 PX, DWDP, APD
Avg. Yield (%) 2.4

t Consumer Cyclical
Companies 9
Avg. P/FV 0.89 VFC, MCD, HAS, TPR, JWN, CCL, IPG, HOG, LB
Avg. Yield (%) 3.5

y Financial Services
Companies 6
Avg. P/FV 0.93 TROW, HBAN, RY, IVZ, HSBC, WBK
Avg. Yield (%) 4.2

u Real Estate
Companies 2
Avg. P/FV 1.15 CCI, HCP
Avg. Yield (%) 5.1

i Communication Services
Companies 4
Avg. P/FV 0.74 CHL, TEF, VOD, T
Avg. Yield (%) 5.3

o Energy
Companies 16
Avg. P/FV 0.98 HFC, PSX, MPC, VLO, SLB, CVX, XOM, PAGP, PAA, WMB, VLP, PSXP, WPZ (ANDX, TEP, EEP– out of range, not charted)
Avg. Yield (%) 5.4

p Industrials
Companies 7
Avg. P/FV 0.95 LMT, FAST, JCI, CMI, ETN, PAYX, IRM
Avg. Yield (%) 3.6

a Technology
Companies 10
Avg. P/FV 0.95 INTC, TXN, SABR, KLAC, MXIM, CSCO, CA, GRMN, IBM, QCOM
Avg. Yield (%) 3.1

s Consumer Defensive
Companies 15
Avg. P/FV 0.87 DPS, SYY, WMT, SJM, HSY, CLX, NSRGY, CPB, UL, K, PEP, KMB, BUD, KHC, BTI
Avg. Yield (%) 3.4

d Healthcare
Companies 12
Avg. P/FV 0.82 LLY, BMY, CVS, MRK, GILD, CAH, ABBV, RHHBY, NVS, AZN, SNY, GSK
Avg. Yield (%) 3.8

f Utilities
Companies 16
Avg. P/FV 0.99 NEE, WR, NI, CMS, XEL, SRE, EXC, DTE, PEG, PNW, WEC, AEP, EIX, CNP, FE, SCG
Avg. Yield (%) 3.7

1.0 2.0 3.0 4.0   5.0 6.0 7.0 8.0

Yield

Data as of May 9, 2018. Ratings, rankings, categorizations, fair value Moat Type Super Sectors Valuation
estimates, and price/fair value estimate ratios are based on the
Wide Narrow None h Cyclical Undervalued Overvalued
analysis and estimates of analysts of Morningstar, Inc. or its affiliates.
j Sensitive
k Defensive
UR = Under Review
Select Equity Portfolios Dividend Select Portfolio - Annualized Total Return (%)
1-Month Year-to-Date 1-Year 3-Year 5-Year 10-Year Since Inception1

Morningstar Investment Management LLC Gross of Fees 1.3 -7.8 -5.3 3.5 6.0 — 11.5

Less 0.55% Fee 1.3 -7.9 -5.8 2.9 5.4 — 10.9

Less 1.65% Fee 1.3 -8.2 -6.9 1.8 4.3 — 9.6

S&P 500 0.4 -0.4 13.2 10.6 13.0 — 15.2

DJ US Sel. Dividend 1.3 -1.3 9.0 11.1 12.0 — 13.9

Dividend Non-MLP Select Portfolio - Annualized Total Return (%)

1-Month Year-to-Date 1-Year 3-Year 5-Year 10-Year Since Inception2

Gross of Fees 0.1 -9.0 -6.1 — — — 5.5

Less 0.55% Fee 0.1 -9.1 -6.7 — — — 4.9

Less 1.65% Fee 0.1 -9.4 -7.7 — — — 3.7

S&P 500 0.4 -0.4 13.2 10.6 13.0 — 11.0

DJ US Sel. Dividend 1.3 -1.3 9.0 11.1 12.0 — 12.4

1 Inception date for Dividend Select: Nov. 17, 2008. 2 Inception date for Dividend Select Deferred: June 8, 2015.
Returns shown for benchmarks in the first year begin on the portfolio’s inception date. Data as of April 30, 2018.

Disclosures
The commentary, analysis, references to, and perfor-
mance information contained within Morningstar®
DividendInvestorSM, 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 Morn-
ingstar, Inc., or in the case of its analysts, its affiliates.
Morningstar Investment Management manages
portfolios using similar investment strategies for clients
as part of the Morningstar® Managed PortfoliosSM
program. The Morningstar Managed Portfolios program
is offered by the entities within Morningstar’s Invest-
ment Management group, which includes subsidiaries
of Morningstar, Inc. that are authorized in the
appropriate jurisdiction to provide consulting or advisory
services in North America, Europe, Asia, Australia,
and Africa. In the United States, Morningstar Managed
Portfolios are offered by Morningstar Investment
Services LLC or Morningstar Investment Management
LLC, both registered investment advisers, as part
of a discretionary investment advisory service or as
model portfolios to third-party advisory programs on a
discretionary or non-discretionary basis. Portfolio
construction and ongoing monitoring and maintenance
of the portfolios within the Morningstar Managed
Portfolios program is provided on Morningstar Invest-
ment Services’ behalf by Morningstar Investment
Management. In the United States, Morningstar
Managed Portfolios are intended for citizens or legal
residents of the United States or its territories
and can only be offered by a registered investment
adviser or investment adviser representative.
Performance for Morningstar Investment Manage-
ment’s related Dividend Select strategies with a 100
equity target is presented on pages 22–23. The
performance is derived from model portfolios seeded on
Nov. 17, 2008 (Dividend Select) and June 8, 2015
(Dividend Select Deferred) and managed by Morning-
star Investment Management in a similar manner
as client portfolios in these strategies (e.g., the timing
of rebalancing and/or reallocation transactions is
the same as when transactions are implemented for
client portfolios.)
Morningstar Investment Management does not
guarantee the results of its advice or recommendations,
or that the objectives of a strategy will be achieved.
Morningstar’s Dividend Select portfolios and the portfo-
lios offered by Morningstar Investment Services or
Morningstar Investment Management may not have
contained and/or may not currently contain the
same underlying holdings and may have been and/or
may currently be managed according to rules or
restrictions established by Morningstar.
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, are provided solely for
informational purposes and therefore are not an offer
to buy or sell a security. This commentary is for informa-
tional 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.
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 assur-
ance 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 materi-
ally and/or substantially from any future results,
performance or achievements expressed or implied by
those projected in the forward-looking statements
for any reason.
Performance
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.
Performance shown for Morningstar’s Dividend
Select portfolios on pages 4 and 5, and the gross-of-
fees performance for the model portfolios managed
by Morningstar Investment Management on pages 22
and 23, does not include the deduction of advisory fees
or other expenses normally incurred in the manage-
ment of a portfolio. Performance shown for Morningstar’s
portfolios does include the deduction of commissions.
Reinvestment of all dividends and master limited part-
nership (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 perfor-
mance shown would be lower.
On pages 22–23, performance is shown for the
model portfolios managed by Morningstar Investment
Management in two additional ways. One includes
an annual advisory fee of 0.55%, which is the maximum
advisory fee that could be charged by Morningstar
Investment Services for portfolios invested in the Divi-
dend Select strategies through its discretionary
Morningstar® Managed PortfoliosSM program. The other
 Dividend Select Portfolio - Total Return By Year (%)

20081 2009 2010 2011 2012 2013 2014 2015 2016 2017 YTD 2018 Cumulative1 Annualized1

Gross of Fees 4.0 12.9 19.5 13.0 12.7 24.7 12.4 1.8 13.2 4.8 -7.8 178.8 11.5
Less 0.55% Fee 4.0 12.5 18.9 12.4 12.1 24.0 11.8 1.1 12.6 4.2 -7.9 165.2 10.9
Less 1.65% Fee 3.8 11.1 17.6 11.2 10.9 22.7 10.6 -0.3 11.4 3.1 -8.2 138.3 9.6

S&P 500 6.6 26.5 15.1 2.1 16.0 32.4 13.7 1.4 12.0 21.8 -0.4 281.0 15.2
DJ US Sel. Dividend 2.5 11.1 18.3 12.4 10.8 29.1 15.4 -1.6 22.0 15.4 -1.3 241.7 13.9

Dividend Non-MLP Select Portfolio - Total Return By Year (%)

2008 2009 2010 2011 2012 2013 2014 20152 2016 2017 YTD 2018 Cumulative2 Annualized2

Gross of Fees — — — — — — — 5.7 14.7 5.9 -9.0 16.9 5.5

Less 0.55% Fee — — — — — — — 5.3 14.1 5.3 -9.1 15.0 4.9
Less 1.65% Fee — — — — — — — 4.3 12.9 4.2 -9.4 11.2 3.7

S&P 500 — — — — — — — -0.5 12.0 21.8 -0.4 35.2 11.0

DJ US Sel. Dividend — — — — — — — 0.8 22.0 15.4 -1.3 40.1 12.4

1 Inception date for Dividend Select: Nov. 17, 2008. 2 Inception date for Dividend Select Deferred: June 8, 2015.
Returns shown for benchmarks in the first year begin on the portfolio’s inception date. Data as of April 30, 2018.

includes an annual advisory fee of 1.65%, which includes
Morningstar Investment Services’ maximum annual
fee plus a maximum annual advisory fee of 1.10% that
could be charged by a financial advisor utilizing the
Morningstar Managed Portfolios program with his or
her clients.
Performance is based on a stock’s market price as of the
close of trading on the last business day of the month
and is calculated using a time weighted, geometrically
linked rate of return formula. Returns for periods longer
than one year are annualized. Results achieved by an
investor using a similar strategy may differ substantially
from the historical performance shown herein, and
may include the portfolio incurring a loss.
Investing Risks
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 Information
Benchmark performance represents the return of an
index consistent with the strategy’s asset allocation
and is provided as a reference only. Indexes are
unmanaged and are not available for direct investment.
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.
Dividend Select Portfolios
Portfolio tables include a list of all holdings in
the Morningstar Dividend Select and Dividend Select
Deferred portfolios as of the date indicated.
This information is subject to change at any time.
Investment Theses and Latest Thoughts
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 portfolio manager, and
may include forward looking statements.
Research Roundup
Research Roundup is a sampling of analyses from
Morningstar, Inc. or its affiliates for the Dividend Select
and Dividend Select Deferred portfolios’ current
holdings published since DividendInvestor’s last publi-
cation 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
Income Bellwethers contains 100 companies that are
selected on the basis of their potential appeal for
income-oriented investors. Selection criteria includes
economic moat ratings from Morningstar, Inc. or
its affiliates of narrow or wide, dividend yields that typi-
cally exceed that of the S&P 500, and company size
as measured by market capitalization. Individual compa-
nies 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.
Portfolio Focus
The Portfolio Focus section contains analyses by Morn-
ingstar, Inc. or its affiliates of several stocks that are
currently held in the Dividend Select and/or Dividend
Select Deferred portfolios. 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 on
Morningstar.com or Morningstar Select, and have been
edited for length. Morningstar’s analysis is provided
for informational purposes only and is not investment
advice or an offer to buy or sell a security. Morningstar
Investment Management may have different opinions
and has not independently verified the accuracy of
the information published by Morningstar. You should
not assume that investments in the securities identified
and discussed were or will be profitable.
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 Manage-
ment for Morningstar’s portfolios. You should not
assume that investments in the securities identified
and discussed were or will be profitable.

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