The Reason I Ignore Morningstar’s Evaluation (My Different Method) [Podcast]

Subscribe

Star ratings are beneficial—unless they turn into a shortcut. Morningstar’s rating of 1–5 stars primarily reflects valuation rather than the quality of the business. Uncover a more intelligent approach to cultivate conviction and comprehend why the stock price or historical return shouldn’t dictate your decisions.

Reserve your place (or view the replay) for our Upcoming Webinar: thedividendguyblog.com/webinar

You’ll Discover

The True Meaning of Morningstar’s Stars

• For equities, Morningstar’s star ratings derive from the disparity between the current price and their fair value estimate (a 12-month target based on a valuation model).

• Greater undervaluation vs. their model = more stars; increased overvaluation = fewer stars.

• Pros: straightforward, numerical, reliable, effective for identifying value opportunities.

• Cons: still depends on assumptions (every model is like a crystal ball), and it leans towards value—which may favor inferior businesses that merely appear inexpensive.

Why Mike Avoids Trading Based on Stars (Morningstar or Others)

• A single number is not a thesis. No individual metric—P/E, yield, stars—captures durability, strategy, or execution risk.

• Valuation models differ based on inputs (growth, margin, discount rate). Alter an input, obtain a new “value.”

• You can imitate someone’s rating, but you can’t replicate their conviction—and without conviction, you will panic amidst volatility.

The Dividend Stocks Rock (DSR) Method: Quality First, Then Value

• Dividend Triangle = 3 crucial trends: revenue, EPS, dividend. Ascending lines indicate a strong engine; descending lines suggest areas that need further examination.

• DSR Pro Rating (1–5): a combination of quantitative trends and qualitative evaluation.

• Dividend Safety Score (1–5): a forward-looking view of dividend capacity and culture (e.g., regular increases = higher score; no increase in 18+ months results in a lower score).

• These are business-health scores, not predictions of price.

Same Stock, Different Viewpoint: Recognizing Rating Differences

• BCE: DSR consistently downgraded quality as the triangle deteriorated prior to the dividend cut; Morningstar awarded it a 5-star valuation rating—low compared to fair value.

• Takeaway: A stock can be “inexpensive” yet low in quality. Decide which viewpoint you embrace.

“Alright, But Does Price Matter?” (And Why DSR Excludes It in Ratings)

• Historical price actions and short-term total returns reflect more about sentiment than the health of the business.

• Instance: Broadcom (2018)—declined approximately 20% in weeks, appeared poor… and then significantly grew over the coming years.

• Concentrate on process over price: evaluate the core business, not recent price fluctuations.

Examples Across the Landscape

How to Effectively Utilize Ratings

• Stick to a single framework to reduce confusion. Mixing rating systems leads to analysis paralysis.

• Employ ratings as a tool