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An all-star cast of dividend stocks

Morningstar staff  |  26 May 2017Text size  Decrease  Increase  |  

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Morningstar's Model Income Equity Portfolio pulls together a strong line-up of quality Australian stocks, many of which Morningstar regards as holding economic moats.


A basket of between 15 and 30 income-producing equity holdings, the Morningstar Model Income Equity Portfolio has only minimal turnover of stocks. Some of the most recent changes were the removal of Spotless Group (ASX: SPO) following its takeover bid from Downer EDI (ASX: DOW).

"It was a volatile ride, but we bought Spotless shares with a good margin of safety and have thus managed to experience a modest gain on the sale," says Joel Bloomer, Morningstar's head of discretionary equity strategies, Asia Pacific.

The capital has been reallocated to the portfolio's currently undervalued holdings of Crown Resorts (ASX: CWN) and Medibank Private (ASX: MPL).

"The overall portfolio impact is a slight improvement in valuation given the two increased positions are trading at more attractive prices relative to estimated intrinsic value. We also suggest quality of the portfolio has improved given the more tenuous competitive advantages of Spotless," says Bloomer.

After these changes, the portfolio currently has 24 holdings, a dividend yield of around 4.8 per cent net and 6.1 per cent gross, and a cash balance that is around 10 per cent of the total portfolio value.

Each of the stocks underlying the portfolio are part of Morningstar's in-depth analysis provided by the equity research team.

What is the Morningstar Model Income Equity Portfolio?

The Morningstar Model Income Equity Portfolio was launched in 2001, starting out as a theoretical portfolio to demonstrate the returns potentially achievable from a concentrated portfolio of high-quality income-producing shares.

According to Bloomer, the target dividend yield for stocks in the model portfolio is greater than the benchmark S&P/ASX 200 Accumulation Index--referred to as the benchmark index--which is also effectively a model equities portfolio with reinvestment of dividends.

"Companies with narrow or wide economic moats and low or medium uncertainty feature heavily in the model because of their more predictable cash flows, more stable dividends, and generally lower share price volatility," he says.

How do Income Portfolio stocks compare with the benchmark index?

The Morningstar Model Income Equity Portfolio is generally invested in similar classes of equities as the benchmark index, in terms of investment objectives, types of investments, countries, and markets/sectors covered.

Only premium subscribers to Morningstar research receive full access to the portfolio, including a comprehensive list of holdings, along with research on all underlying stocks.

"Both the model portfolio and the benchmark are therefore exposed to some normal investment risks such as foreign exchange, sector, manager and liquidity risk, but not to risks such as derivatives," Bloomer says.

"As both represent equity investments, they are likely to experience volatility common with the asset class, although it is our goal to generate less risk than the benchmark in the long run."

How is performance calculated?

Performance for both the Morningstar Model Income Equity Portfolio and the benchmark is expressed on a few underlying assumptions, "so that we are comparing apples with apples," says Bloomer.

• Before deduction of fee--such as those charged for entry, exit, performance or management costs, and taxes payable by either the portfolio/benchmark or the investor;

• Without allowing for franking credits or interest earned on cash balances; and

• Dividends that would notionally be received are theoretically reinvested without any tax deduction.

Where this model is offered as an investable option by third-party providers, management fees of between 0.44 per cent and 0.85 per cent (inclusive of GST) will be charged.

Investors may also be charged performance fees of between 10 per cent and 15 per cent of any outperformance. Third-party providers may also charge their own fees.

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Glenn Freeman is a senior editor at Morningstar.

© 2017 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'class service' have been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. Please refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/s/fsg.pdf. Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782 ("ASXO"). The article is current as at date of publication.