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Morningstar Dividend Methodology Printer Friendly Report
Dividend Leaders Dividend Composite Index FAQ
About the Indexes
What are the primary objectives of the Morningstar
  Dividend Indexes?
What is the definition of the Indexes in the Morningstar
  Dividend Index series?
How many years of back history data is available for the
  Indexes?
Are the Indexes calculated in real-time?
 
Methodology
What are the Index eligibility requirements?
How frequently do you rebalance the Indexes?
How does Morningstar assign stocks to the Index?
How are the stocks in the Index weighted?
Why do you use “available dividend” methodology
  to weight stocks?
Does Morningstar cap the individual security weights in
  the index?
Is the index compliant with Registered Investment
  Company (RIC) guidelines?
Does Morningstar cap sector weights in the index?
 
What are the primary objectives of the Morningstar Dividend Indexes?
We created the Morningstar Dividend Indexes to serve two primary objectives:
 
Benchmarks for Performance Measurement
Equity portfolios with the objective of delivering high-income yield have traditionally used either a broad market index or a value-biased index for performance benchmarking. Measuring performance against a more appropriate benchmark—one reflecting the same risk return profile as the active manager—is a crucial step in the investment process. The Morningstar Dividend Composite Index is a broad based index that captures the performance of stocks that have a consistent record of dividend payment and the ability to sustain those dividends.
 
Investment Product Creation
Morningstar Dividend Indexes were designed to support investment product creation. Comprising the best practices in index construction—liquidity, broad diversification, macro-consistency and controlled turnover—the indexes are a sound basis for index funds, exchange traded funds and derivative products.
 
What is the definition of the Indexes in the Morningstar Dividend Index series?
There are currently two Indexes in the Morningstar Dividend Index series:
 
Morningstar Dividend Composite Index
The Morningstar Dividend Composite Index captures the performance of all stocks in the US Market Index that have a consistent record of dividend payment and have the ability to sustain their dividend payment. Stocks in the index are weighted in proportion to the total pool of dividends available to investors.
 
Morningstar Dividend Leaders Index
The Morningstar Dividend Leaders Index captures the performance of the 100 highest yielding stocks that have a consistent record of dividend payment and have the ability to sustain their dividend payments. Stocks in the index are weighted in proportion to the total pool of dividends available to investors.
 
How many years of back history data are available for the indexes?
The back histories for the Morningstar Dividend Leaders Index and the Dividend Composite Index begin in June 1997. We have taken adequate care to ensure the back history is free of survivorship bias.
 
Are the indexes calculated in real-time?
Morningstar offers real-time index values for the Morningstar Dividend Leaders Index. The American Stock Exchange calculates the indexes in real time and disseminates the data through Network B of the Consolidated Tape Association. The ticker symbol for the Morningstar Dividend Leaders Index is MDL. Index values are available through leading data vendors.
   
Currently, we calculate the Morningstar Dividend Composite Index once a day—at the end of each business day.
   
What are the index eligibility requirements?
To be eligible for inclusion in Morningstar Dividend Indexes a security must:
Be a part of the Morningstar US Market Index
Pay a dividend
 
Real Estate Investment Trusts (REITS) are not included in the Index.
 
How frequently do you rebalance the Indexes?
Morningstar rebalances constituent shares and weights of its indexes quarterly in March, June, September, and December (on the Monday following the 3rd Friday). However, we reconstitute the indexes—securities added and/or deleted—on an annual basis.
   
How does Morningstar assign stocks to the Index?
Securities must meet two screens to be included in the Morningstar Dividend Indexes:
 
Dividend Consistency
A company’s current dividend must be equal to or greater than the dividend paid five years ago. This ensures the company has a well-established and stable dividend policy. Focusing on dividend stability—instead of growth—allows for the inclusion of some cyclical companies that may not realistically or safely raise their dividend each year, yet have a reasonably high yield relative to the market.
 
Dividend Sustainability
A company’s dividend coverage ratio must be greater than or equal to 1. Earnings provide a margin of safety for dividends. Screening for dividend sustainability helps weed out companies that are placating investors by paying out inflated dividends that cannot last. The sustainability screen uses forward looking measures, favoring companies expected to have sufficient earnings to cover their dividends.
 
Dividend coverage ratio = Earnings per share (1 year estimate)/Dividends per share >=1
 
Selection
All stocks that pass these screens form the Dividend Composite Index. While the top 100 stocks ranked by dividend yield are included in the Dividend Leaders Index.
 
How are the stocks in the Index weighted?
We weight stocks in proportion to the total pool of available dividends which factors in both the size of a company and the amount of the dividends paid by the company. We call this weighting system ‘available dividends’. The available dividends for a company are determined by multiplying the dividend per share by the number of shares actually available for purchase (the float).
 
Available dividends = Dividend per share x Number of shares outstanding x Float factor
 
Why do you use ‘available dividend’ methodology to weight stocks?
Using available-dividends as a weighting methodology allows for greater investment capacity for the index vehicles. Focusing on stocks that have an ample supply of dividends better protects investors from supply/demand imbalances that can drive up stock prices as too many buyers vie for too few shares.
 
Example
Company A may pay a dividend of $3 per share. But if the company is closely held and only one third of its six million shares are available for purchase in the market, its available dividend would be $3 per share times 6 million shares times a float factor of 33%, for a total of $6 million in available dividends.

Company B, on the other hand, may have a dividend of only $2 per share but all six million of its shares are available for purchase. Its available dividend would be $2 per share times 6 million shares times a float factor of 100%, for $12 million in available dividends.

Favoring Company B over Company A allows for greater investment capacity in the portfolio. In other words, investors collectively are less likely to run out of available stock as they try to build a stake in any given company.
 
Does Morningstar cap the individual security weights in the Index?
To enhance portfolio diversification, we cap the weights of individual holdings in the index at 10% of the portfolio. We redistribute the excess weights using a formula that maintains the order of the weights and preserves the relative weights for as many holdings as possible.
   
Is the Index compliant with Registered Investment Company (RIC) guidelines?
Yes, the index is compliant with the RIC guidelines. In addition to capping individual security weights at 10% of the portfolio, individual stocks weighing more than 5% each cannot collectively exceed 50% of the total portfolio. We redistribute the excess weights using a formula that maintains the order of the weights and preserves the relative weights for as many holdings as possible.
   
Does Morningstar cap sector weights in the index?
We do not cap sector weights in the index. Traditionally, companies in a handful of sectors—Financial and Utilities—have dominated the dividend paying universe. By placing artificial caps on sectors, the makeup of the index may not be truly representative of the opportunity set. Also, when placing caps on sectors, the portfolio turnover increases significantly; an undesirable characteristic for an index fund.
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