Using Morningstar Premium as a dividend stock screener can be a unique approach because of the Economic Moat universes. There is a wide moat and a narrow moat. And they can be combined into a single universe.
Warren Buffet came up with the term Economic Moat as a way to illustrate competitive advantage.
MorningStar has taken this idea and has their analysts identify companies with either a wide moat (long term competitive advantage) or a narrow moat (10 year advantage). In their words - “The idea of an economic moat refers to how likely a company is to keep competitors at bay for an extended period." You can see their online explanation, or check the Pat Dorsey book in the Bibliography.
It is worth mentioning that the moats contain thinly traded stocks as well as companies listed on the OTC exchange. You may want to filter those out.
Below is the screen built to create the dividend portfolio in Morningstar. Since it is not possible to upload a list of Dividend Champions and there is not 25 years of data, the obvious choice is to use Wide Economic Moat companies as the base universe.
With the universe in place, it was just a matter of adding the other criteria. All the desired criteria are available except allowing latitude for utilities.
The screen was then saved by name and the button was clicked to view results of the screen.
The following are the top 7 companies sorted by yield of the 21 that passed the screen on Feb 18, 2017. Note that it may be interesting (and more profitable) to use only companies with 3 or more stars. If yes, the rule can be added to the criteria in the screen.
By checking the box to the left of the stock name, you can add them to your tracking portfolio.
For a larger universe, including the narrow moat will add several hundred companies.
In any case, criteria to exclude OTC exchange should be added. The trading volume for dividend stocks is probably not an issue, but better safe than sorry as thinly traded stocks can be a problem (selling, not buying). Unfortunately, the screener only offers average share volume, not average dollar volume traded.
A basic decision is whether to simply buy (or hold) only positions that currently pass your screen, or to hold a position until it meets a target or deteriorates. In the first case, you are done except for running the screen on a pre-determined schedule to update your positions.
Otherwise, you will run the screen on a regular basis until you have acquired the desired number of positions.
The default for dividend/income investing is to hold a position until a sell signal occurs. NOTE: Lack of a buy signal is NOT a sell signal.
If you plan to manage your portfolio with sell criteria, the solution in this product is not very accommodating. The problem is you cannot run a screen against your portfolio. NOTE: remember to include stocks you hold in the portfolio.
One solution is to include criteria in the portfolio view which would trigger a sell. In this case, you would on a regular basis check the values. MorningStar also emails the status when it changes, which is a plus.
Another approach is to create a sell criteria screen and run against the Economic Moat universe used in your buy screen. If one of your holdings shows up in the results, sell it.
Although the expectation is that positions will be held for years, it is necessary to periodically check your holdings to see if any are no longer worth holding. They don't just naturally expire after some fixed holding period like 3 years.
In addition, if you have not yet met the desired number of holdings for this portfolio, you need to check for additions.
Set a time (weekly, monthly, quarterly, ...) to run your dividend stock screener to check for sells. If you need to replace a position or add an additional position, run your buy screen.
Run your sell screen before your buy screen.
In his book (see Bibliography), Josh Peters offers some valuable insight on evaluating moat stocks for dividends. As editor of their DividendInvestor newsletter and currently a fund manager at Oppenheimer, he brings credibility to the discussion.
Many of his suggestions are quantitative and can be incorporated in the MorningStar Premium screener. Some quantitative criteria are not available in the screener and other criteria require qualitative judgement on your part.
One variation supported by research, is buyback yield. It is not directly available in MorningStar Premium, but shares outstanding is available. To see an example of how to use, open the MorningStar "Buyback Champions" pre-built screen.
If you already subscribe to MorningStar Premium you already have access to the screener and building a dividend stock screener with the Economic Moat universe is straight-forward.
Otherwise, you need to weigh the benefits of the Premium package compared to other screeners.
The plus with this product is the Economic Moat; the negative is not being able to directly screen your portfolio.
Dividend Stock Screener > MorningStar
The books listed below are oriented to MorningStar (no surprise, both Dorsey and Peters were employees) but offer excellent insight into stock selection and dividend investing.
Dorsey, Pat. The Little Book that Builds Wealth : The Knockout Formula for Finding Great Investments (Wiley, 2008). Currently running his own investment firm, Dorsey was the Director of Equity Research at MorningStar through 2011 and played an integral role in the development of their proprietary Economic Moat ratings.
This is the definitive book on Economic Moat.
Peters, Josh. The Ultimate Dividend Playbook : Income, Insight, and Independence for Today's Investor (Wiley, 2008). Peters is currently a portfolio manager at Oppenheimer. Until December 2016, he was the editor of the MorningStar DividendInvestor newsletter. The book offers excellent insight into dividend investing criteria as well as possible variations into implementing. Except for the moat, the criteria can be implemented in other screeners - in some cases better than MorningStar.
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