A Rising Dividend? Bank on It!

This past week, banking giant Wells Fargo (WFC -0.66%) announced that it will increase its dividend from $0.30 to $0.35 per quarter. That increase puts Wells Fargo's quarterly dividend $0.01 ahead of what the bank was paying when it was forced to start cutting its dividend during the financial crisis. 

With that increase, Wells Fargo joins the ranks of portfolio picks in the real-money Inflation-Protected Income Growth portfolio that increased their dividends since being selected for that portfolio. Rising dividends are the primary way that the IPIG portfolio seeks to combat inflation, and Wells Fargo's 16.7% increase handily bested the official inflation rate over the past year. 

A portfolio of dividend growers
While the IPIG portfolio hasn't received any dividend payments since last week's update, the portfolio has reached the point where virtually every selection has increased its dividend since becoming a pick. The only pick that hasn't yet is lawn care titan Scotts Miracle-Gro (SMG -2.33%), which just joined the portfolio this January.

Scotts Miracle-Gro operates in a very seasonal industry, and the winter is typically weak for the company. In recent years, the company has increased its dividend in the summer months (closer to its peak season). Once the weather starts breaking for good, we'll start to learn whether Scotts Miracle-Gro will have a shot at maintaining its recent streak of dividend increases.

While there are no guarantees in investing, the IPIG portfolio's strong track record in finding dividend growers shows the potential benefits of actively seeking out companies that fit the trend. To make the cut, every IPIG selection had to meet the following characteristics:

• A dividend with a history of growth.
• Some reason to believe the dividend growth could continue.
• A healthy enough balance sheet to enable to handle the occasional economic rough spots.
• A reasonable price tag based on some fundamental valuation method.
• A decent overall fit from a diversification perspective.

Thus far, it seems to be working.

Still, there are risks
Dividends are not guaranteed payments, however, and a company typically has to make good on every higher priority financial commitment (like bond interest) before it can use its cash for dividends. That's why paying attention to a company's payout ratio can help you keep track of how much risk a company has of reducing -- or even of failing to increase -- its dividend.

Within the IPIG portfolio, energy pipeline giant Kinder Morgan (KMI -0.29%) likely has the greatest risk to its dividend. As the company that owns the general partner of a master limited partnership group of businesses, Kinder Morgan's dividend is linked to the group's overall cash flow. Because of that structure, it's common for its dividend to exceed the company's reportable net earnings.

With that type of payout, Kinder Morgan and the partnerships it relies on has to execute with excellence in order to have the cash flow to cover its dividends. While the company itself anticipates that Kinder Morgan will pay an 8% higher distribution in 2014 than it did in 2013, its recent 10-K filing also lists more than 12 pages of risks that may restrict its ability to deliver to that goal.

That's why you diversify
Only time will tell whether Kinder Morgan -- or any of the other companies in the IPIG portfolio -- will continue to pay and increase its dividends. That's the key reason why the IPIG portfolio varies the industries it invests in.

After all, while Wells Fargo's recent 16.7% dividend hike is quite nice, it wasn't that long ago that the entire banking industry was in crisis because of the financial meltdown. Many banks -- Wells Fargo included -- were forced to cut their dividends during the crisis. As an investor looking for dividend growth, too much portfolio concentration in a single industry exposes you to the risks from that sort of industry-level meltdown

By building on the IPIG portfolio's principles of dividends, valuation, balance sheet strength, and diversification, you still don't get any guarantees from the market. But what you do get is a solid foundation for the potential of decent risk-adjusted returns. As of the market's close on Friday March 28, the IPIG portfolio looked like this:

Data from the IPIG portfolio brokerage account, as of March 28, 2014.

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