Please ensure Javascript is enabled for purposes of website accessibility
Free Article Join Over 1 Million Premium Members And Get More In-Depth Stock Guidance and Research

A Rising Dividend? Bank on It!

By Chuck Saletta - Mar 30, 2014 at 8:10PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Wells Fargo's dividend increase added it to the list of companies providing growing levels of income for this real-money portfolio.

This past week, banking giant Wells Fargo ( WFC -2.37% ) 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 -4.07% ), 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 -0.89% ) 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:

Company Name

Purchase Date

Total Investment (Including Commissions)

Current Value
March 28, 2014

Current Yield
March 28, 2014

United Technologies

12/10/2012

$1,464.82

$2,066.58

2.06%

Teva Pharmaceutical

12/12/2012

$1,519.40

$1,879.10

2.58%

J.M. Smucker

12/13/2012

$1,483.45

$1,640.16

2.40%

Genuine Parts

12/21/2012

$1,476.47

$1,960.29

2.70%

Mine Safety Appliances

12/21/2012

$1,504.96

$2,016.36

2.14%

Microsoft

12/26/2012

$1,499.15

$2,216.50

2.78%

Hasbro

12/28/2012

$1,520.60

$2,372.74

3.12%

UPS

1/2/2013

$1,524.00

$1,946.80

2.75%

Walgreen

1/4/2013

$1,501.80

$2,614.40

1.93%

Texas Instruments

1/7/2013

$1,515.70

$2,192.08

2.57%

Union Pacific

1/22/2013

$805.42

$1,108.50

1.97%

CSX

1/22/2013

$712.50

$971.72

2.10%

McDonald's

1/24/2013

$1,499.64

$1,555.84

3.33%

Becton, Dickinson

1/31/2013

$1,518.64

$2,079.72

1.89%

Aflac

2/5/2013

$1,466.35

$1,691.82

2.36%

Air Products & Chemicals

2/11/2013

$1,510.99

$1,994.10

2.63%

Raytheon

2/22/2013

$1,473.91

$2,663.55

2.45%

Emerson Electric

4/3/2013

$1,548.12

$1,869.28

2.58%

Wells Fargo

5/30/2013

$1,525.48

$1,823.73

2.43%

Kinder Morgan

6/21/2013

$1,518.37

$1,349.88

5.10%

Scotts Miracle-Gro

1/3/2014

$1,974.68

$1,920.96

2.92%

Cash

   

$971.37

 

Total Portfolio

   

$40,905.48

 

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

To follow the IPIG portfolio as buy and sell decisions are made, watch Chuck's article feed by clicking here. To join The Motley Fool's free discussion board dedicated to the IPIG portfolio, simply click here.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Wells Fargo & Company Stock Quote
Wells Fargo & Company
WFC
$47.75 (-2.37%) $-1.16
The Scotts Miracle-Gro Company Stock Quote
The Scotts Miracle-Gro Company
SMG
$134.00 (-4.07%) $-5.69
Kinder Morgan, Inc. Stock Quote
Kinder Morgan, Inc.
KMI
$15.59 (-0.89%) $0.14

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
624%
 
S&P 500 Returns
141%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 12/05/2021.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Our Most Popular Articles

Premium Investing Services

Invest better with the Motley Fool. Get stock recommendations, portfolio guidance, and more from the Motley Fool's premium services.