Dividend Growth 50: Income Up Nearly 10%, Led By Kinder Morgan (Seriously!)

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Includes: AAPL, ADP, AFL, BAX, BDX, CAT, CL, CLX, COP, CVX, D, DE, EMR, GE, GIS, GPC, HCP, HSY, IBM, JNJ, KHC, KMB, KMI, KO, LMT, MCD, MKC, MMM, MO, MSFT, NEE, O, OHI, PEP, PG, PM, QCOM, QCP, SBUX, SHPG, SJM, SO, T, TGT, UTX, V, VZ, WBA, WEC, WFC, WMT, XOM
by: Mike Nadel
Summary

A second-quarter review reveals outstanding year-over-year income growth for the DG50.

Believe it or not, long-time laggard KMI set the pace.

20 other DG50 positions also experienced double-digit income growth, including Visa, Starbucks, Pepsi, and Apple.

GE was the only component to suffer an annual income decline.

Here's one from the Wonders Never Cease Dept.: When I say the Dividend Growth 50 has been "kindered," this time, it's actually a good thing!

As has been the case with many Dividend Growth Investing portfolios, the DG50 was scarred by the presence of Kinder Morgan (KMI). Not only did KMI's price crater along with those of most other oil-related companies in 2015-16 ... and not only did management break a promise to raise the dividend by 10% annually from 2015 to 2020 ... and not only has KMI's price failed to rebound as strongly as many others in the sector ... but the oil/gas pipeline company infamously cut its dividend by 75% in the winter of 2016.

Retirees counting on that income were devastated, and younger investors hoping to see their dividends compound were disappointed. All of which led many to scream:

"%$@#! I'VE BEEN KINDERED!"

Fast-forward to the present and get ready to pinch yourself. KMI not only was the DG50's biggest income-grower in the second quarter of 2018, but at 64%, it earned that distinction by a wide margin.

KMI's dividend still isn't what it was before the cut, but hey ... we're always happy to get encouraging news.

Two other companies that had slashed their divvies - Baxter (BAX) and ConocoPhillips (COP) - also are producing double-digit income growth again. Throw in continued advances from the likes of Visa (V), Pepsi (PEP) and NextEra Energy (NEE), and the DG50 experienced year-over-year income growth of nearly 10% in Q2.

A Little DG50 Background

In the fall of 2014, I asked 10 Seeking Alpha contributors, most of whom practiced some form of DGI, to choose 50 companies each. The compilation was called the New Nifty Fifty.

Two months later, I put $25,000 of my own money into an equally weighted portfolio of the stocks and dubbed the project the Dividend Growth 50. I since have written dozens of articles about it, as documented by DG50 panelist Eric Landis in his blog, DGI For The DIY.

Another panelist, Bob Wells, asked me to start doing quarterly income reviews (in addition to my customary year-end looks at total return). His request made sense because the DG50 includes so many companies that are popular with so many Seeking Alpha users, especially DGI proponents.

Perhaps this article (and comment stream) will provide candidates for investors to research, as well as insight into concepts that many might find appealing. Remember: My DG50 work is never a recommendation that other investors re-create the portfolio or invest in any of its components.

Without further ado, here is a look at the DG50's income growth in the April-June period compared to the second quarter of 2017:

COMPANY

Q2 2017 DIVIDENDS

Q2 2018 DIVIDENDS

INCREASE

Kinder Morgan

$1.78

$2.92

64.04%

Visa

$1.34

$1.72

28.36%

Baxter

$1.33

$1.66

24.81%

Aflac (AFL)

$3.64

$4.49

23.35%

Clorox (CLX)

$4.24

$5.21

22.88%

Starbucks (SBUX)

$3.10

$3.79

22.26%

Altria (MO)

$6.65

$7.91

18.95%

Pepsi

$4.29

$5.09

18.65%

3M (MMM)

$3.74

$4.42

18.18%

Apple (AAPL)

$3.29

$3.87

17.63%

Shire (SHPG)

$0.80

$0.94

17.50%

NextEra Energy

$5.26

$6.10

15.97%

Dominion Energy (D)

$5.76

$6.63

15.10%

Omega Healthcare (OHI)

$9.63

$11.05

14.75%

Qualcomm (QCOM)

$4.30

$4.87

13.26%

Automatic Data (ADP)

$3.59

$4.05

12.81%

McCormick (MKC)

$3.44

$3.88

12.79%

Lockheed Martin (LMT)

$5.83

$6.56

12.52%

Exxon Mobil (XOM)

$5.00

$5.54

10.80%

McDonald's (MCD)

$5.05

$5.56

10.10%

ConocoPhillips

$2.30

$2.53

10.00%

WEC Energy (WEC)

$6.14

$6.75

9.93%

Microsoft (MSFT)

$4.56

$5.01

9.87%

Genuine Parts (GPC)

$3.56

$3.91

9.83%

Johnson & Johnson (JNJ)

$4.48

$4.92

9.82%

Realty Income (O)

$7.71***

$8.40***

8.95%

Hershey (HSY)

$3.26

$3.55

8.90%

Coca-Cola (KO)

$4.74

$5.16

8.86%

IBM (IBM)

$4.86

$5.29

8.85%

Walgreens Boots (WBA)

$2.73

$2.97

8.79%

United Technologies (UTX)

$2.79

$3.03

8.60%

Southern (SO)

$6.44

$6.99

8.54%

Target (TGT)

$4.50

$4.85

7.78%

Chevron (CVX)

$5.96

$6.42

7.72%

Kraft Heinz (KHC)

$5.79

$6.23

7.60%

AT&T (T)

$8.26

$8.88

7.51%

Colgate-Palmolive (CL)

$2.94

$3.16

7.48%

Procter & Gamble (PG)

$4.45

$4.78

7.42%

Verizon (VZ)

$7.04

$7.54

7.10%

Philip Morris (PM)

$6.91

$7.39

6.95%

J.M. Smucker (SJM)

$3.94

$4.20

6.60%

Kimberly-Clark (KMB)

$4.12

$4.38

6.31%

Wells Fargo (WFC)

$3.64

$3.85

5.77%

General Mills (GIS)

$5.14

$5.43

5.64%

HCP (HCP)

$4.65

$4.91

5.59%

Walmart (WMT)

$6.50**

$6.80**

4.62%

Becton Dickinson (BDX)

$3.03

$3.16

4.29%

Emerson Electric (EMR)

$4.16

$4.33

4.09%

Caterpillar (CAT)

$4.19

$4.35

3.82%

Deere (DE)

$3.83

$3.90

1.83%

General Electric (GE)

$5.16

$2.67

(-48.26%)

Quality Care Prop. (QCP)

NA*

NA*

NA

TOTALS

$229.84

$252.00

9.64%

*** O pays monthly dividends. ** WMT paid two dividends in the second quarter of each year, in April and June. * QCP does not pay a dividend.

Notes And Observations

The numbers in the table reflect the actual cash dividend paid to the DG50 by each company in each quarter. So, how is it possible that the QCOM position's income grew by 13.26% year over year even though the company raised its dividend by only 8.8%, or that the HCP holding's income grew by 5.59% even though the firm hasn't raised its dividend in years?

Compounding, my friends!

Because portfolio rules mandate reinvestment of dividends - a process informally called "dripping" - more shares of each company get purchased every quarter. Then, those new shares receive divvies, which also are reinvested. That's how an investor drips his or her way to a reliable, growing income stream!

(Photo from Instphil.org) Going into this year, there had been some concern about the ability of companies to keep growing their dividends. But 21 of the DG50's components - more than 40% of the portfolio - experienced year-over-year income growth of at least 10%. Half a dozen came in at more than 20%.

Spurred by a 15.2% dividend hike, the Pepsi holding experienced 18.65% income growth. Led by its snacks division, the company then had an outstanding earnings report that included 2.6% organic growth in the second quarter and reaffirmation of its guidance. That's good news for future dividend increases.

Thanks to the steady rise of Brent crude prices (as shown in the Bloomberg graphic below), a nice chunk of the DG50's Q2 income growth could be attributed to the recovery of the oil patch.

In addition to the dividend comebacks of KMI and COP, the industry's rally resulted in XOM announcing a bigger increase than many analysts anticipated (6.5%). And even CVX got back into the raise game. Those four positions combined to bring about 16% more income into the DG50 in Q2 this year than they did in the same quarter of 2017.

Utilities NEE, D, and WEC continued to shine, and even the SO position had 8.54% income growth.

On the negative side, GE severely cut its dividend for the second time in less than 10 years. That made for it being the only DG50 company to show an annual income decline.

Chart GE Dividend data by YCharts

Consumer staples KMB, GIS, and WMT continue to plod along with minimal dividend growth. General Mills' board of directors has suggested that a freeze to its payout level is very possible, but the company is still expected to extend its 119-year streak of paying dividends with nary a reduction.

Omega Healthcare had raised its dividend every single quarter for six years. But with skilled nursing REITs facing headwinds, CEO Taylor Pickett said not to expect an increase in 2018. Sure enough, OHI's payout was unchanged from Q1 to Q2. Nevertheless, again due to compounding, the DG50's Omega position saw nearly 15% income growth year over year.

Sharp-minded readers might have noticed that the portfolio has 52 companies, thanks to corporate actions by Baxter and HCP that resulted in Shire and Quality Care coming aboard. If the Big Ten can keep its name despite having 14 schools, I see no reason to change the Dividend Growth 50's moniker.

Hut ... Hut ... Hikes!

Seven DG50 companies paid increased dividends during the April-June quarter.

COMPANY

RAISE

AMT

EX-DIV

PAY

KMI

60.00%

.20

4/27

5/15

AAPL

15.87%

.73

5/11

5/17

JNJ

7.14%

.90

5/25

6/12

XOM

6.49%

.82

5/11

6/11

IBM

4.67%

1.57

5/9

6/9

PG

4.00%

.7172

4/19

5/15

SO

3.45%

.60

5/18

6/6

The raises for Apple, Johnson & Johnson, and Exxon Mobil were more generous than recent hikes.

IBM is going in the other direction, with its poorest raise since it froze its dividend in 1995. That's the kind of thing that happens when a company has trouble growing earnings and free cash flow.

The above FAST Graphs illustration shows Big Blue's FCF struggles, with no double-digit increases this decade, growth of only 1% and 3% the last two years, and expected FCF declines in 2018 and 2019. If those projections come to pass, IBM's free cash flow will have advanced less than 4% total in 10 years.

Future Divvy Dollars

During the April-June period, nine DG50 companies announced raises to kick in with their Q3 dividend payments:

COMPANY

RAISE

AMT

EX-DIV

PAY

SBUX

20.00%

.36

6/29

7/13

BAX

18.75%

.19

5/31

7/2

DE

15.00%

.69

6/28

8/1

CAT

10.26%

.86

7/19

8/20

WBA

10.00%

.44

8/17

9/12

ADP

9.52%

.69

6/7

7/2

PM

6.54%

1.14

6/21

7/11

TGT

3.23%

.64

8/14

9/10

O

0.23%

.22

6/29

7/13

Four of those companies have had more than one dividend raise in the past year: SBUX, two, with a total increase of 44.00%; ADP, two, with a total increase 21.05%; PM, two, with the total increase of 10.00%; and O, five, with the total increase of 4.02%.

With industrial giants Deere and Caterpillar showing improved earnings, they are finally putting the income-growth pedal to the medal again. DE's dividend had been frozen since Q2 of 2014, and CAT had a measly 1.3% divvy growth from Q3 of 2015 through this year's second quarter.

Chart DE Normalized Diluted EPS (TTM) data by YCharts

Philip Morris actually increased its dividend one quarter earlier than it usually does and raised it more than many analysts had expected. There has been speculation that this was a bit of a desperation move - "Look, shareholders! All is well!" - after a poor earnings report April 19 caused its share price to plummet.

PM's next earnings statement is this Thursday (July 19), and it will be interesting to see if the numbers are more promising.

Time To Go Shopping?

Well into the 10th year of this bull market, it's a tricky time for investors. Valuations in many sectors are high, but macro conditions have adversely affected prices in other industries.

For example, rising interest rates have tamped down prices of many REITs, consumer staples, and utilities, while the trade tussle has beaten down some sectors, most notably industrials. With rates expected to keep rising, and with so many unknowns about how the tariff situation will get resolved, it's difficult to determine if these are buying opportunities or reasons to steer clear. (As a long-term investor, I lean toward "buying opportunities.")

Looking specifically at DG50 companies, one itching to increase one's income understandably might be tempted by AT&T. It is yielding 6.3%, and it is trading at a sub-10 multiple for the first time since the Great Recession.

With its forward P/E falling below 20 and its yield rising near 3%, Starbucks seems pretty attractive. So do JNJ, MO, PM, SJM and a few others - as long as potential investors are OK with some of the challenges those companies face.

It isn't easy to make valuation-related cases for lower-yielding, "growthier" companies such as Visa, Becton Dickinson, McCormick and even NextEra, as they have gotten awfully pricey. Despite its recent run near its all-time high, Apple - with a 14.9 forward P/E ratio and 1.2 PEG - looks about fairly valued.

I know I'd rather buy AAPL than laggards such as GE and IBM. Of course, a couple of years ago, folks were using "laggards" to describe Target, Deere, Walmart, McDonald's, all oil-industry companies and, well, Apple.

Conclusion

Several Dividend Growth 50 companies already have pledged double-digit divvy hikes in future years, including NextEra and Dominion.

And, yes, Kinder Morgan.

Here was the promise chairman Rich Kinder made just about a year ago:

We plan to increase our dividend for 2018 by 60% from the current level of $0.50 per year to $0.80 per year beginning with the dividend payable for Q1 of 2018. We then expect to continue to increase the dividend by 25% per year '19 and '20, resulting in a dividend of ... $1.25 in 2020.

KMI became a four-letter word to many investors for failing to live up to similar pledges in the past. With its balance sheet in better shape this time around - and with its industry in better shape, too - I'm optimistic that kindering can be seen as something positive going forward.

That's only one of many reasons I'm psyched about this project. Of all the DG50 reviews I've done so far, this quarter's year-over-year income growth has been the best yet.

Lastly, this is the first DG50 article I have written since the passing of my colleague David Fish. He was one of the project's panelists, the brain behind the invaluable Dividend Champions list, and a selfless gentleman who willingly helped his fellow Seeking Alphites. I dedicate this to our absent friend.

Disclosure: I am/we are long ALL COMPANIES MENTIONED. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.