Morningstar Advisor - June/July 2011 - (Page 70)

Screens More Steak Than Sizzle By RJ Towner Use this screen to find utilities that should provide even-keeled long-term returns. As commodity prices continue to rise, the stock market remains strong. However, fears of peaking corporate profits and disruptive oil prices could provide some near-term headwinds. Utility companies tend to be immune from these concerns because prices are state-regulated and everyone needs power. Without the growth appeal of a highflying consumer name or the commodity leverage of a basic-materials company, utilities have remained reasonably flat and focus on paying shareholders stable dividends. Here are some companies with income and growth power. Morningstar’s coverage universe extends to both foreign and domestic firms. And Dividend Yield . 4% And ( Fair Value Uncertainty 5 Low Or Fair Value Uncertainty 5 Medium ) The intent of this screen is to find conservative investments, so these criteria focus on companies with reasonably low amounts of uncertainty—this reduces overall risk. A dividend yield of more than 4% provides a similar return to the most elite investment-grade bonds. It also shields investors from sustaining drastic losses, because investors shift to high-dividend stocks as their yields spike higher. This screen, run in Morningstar Principia at the end of April, returned a handful of companies, all of which are in interesting situations: American Electric Power AEP And Morningstar Rating Overall . 3 Sector 5 Utilities In order to find undervalued stocks, focus the search on companies that are trading at significant discounts to Morningstar analysts’ fair value estimates. Higher discounts imply higher upside. With a widely diversified stable of service territories and assets across 11 states, American Electric Power is a good candidate 70 Morningstar Advisor June/July 2011

Table of Contents for the Digital Edition of Morningstar Advisor - June/July 2011

Morningstar Advisor - June/July 2011
Letter From the Editor
Questions for the Secret Society
Are 529 Plans a Useful Tool for Clients’ College-Savings Goals?
Taking the Lead
How to Sell Covered Calls
The College-Savings Challenge
Time to Play Defense?
Four Picks for the Present
Investment Briefs
Careful What You Wish For
Caution in Utilities After Japan Crisis
Blossoms and Thorns in the 529 Garden
Lower Fees, Competitive Returns Help More 529s Make the Grade
Morningstar Grades 529 Plans
529 Risks Include the Political
Researching 529 Plans Made Easy
How Closed-End Funds Are Born
Boutique Within a Bank
The Inefficient Pricing of Moats
More Steak Than Sizzle
Mutual Fund Analyst Picks
50 Most Popular ETFs
Undervalued Stocks With Wide Moats
The Dangers of Demonizing

Morningstar Advisor - June/July 2011