Dividend Growth 50: Oh Deere Me, This Portfolio's Income Just Keeps Plowing Ahead

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Includes: AAPL, ADP, AFL, BAX, CAT, CLX, D, DE, GE, KHC, KMI, MCD, MMM, OHI, PEP, QCOM, TAK, WFC
by: Mike Nadel
Summary

This 2019 second-quarter review analyzes the DG50's excellent year-over-year income growth.

Laggards until recently, Deere, Wells Fargo and Caterpillar are rewarding shareholders with zooming dividends.

Resurgent KMI is one of 19 other DG50 components that also experienced double-digit income growth.

All wasn't perfect, as GE and Kraft Heinz slashed their dividends.

Also, a quick look at whether any of DG50 companies offer good values today.

Quarter after quarter, year after year, the announcement would come, the dividend would stay frozen at 60 stinkin' cents, and income-focused Deere (DE) investors would grumble.

Yes, for four years, nothing ran (in place) like a Deere (dividend).

Then came May 30, 2018, when the company announced it was raising its quarterly payout to 69 cents per share, its first hike since the second quarter of 2014. And then came Dec. 5, when the farm equipment maker said the dividend would be going up yet again, this time to 76 cents.

As a result of this double dose of Divvy Dollar delight, Deere went from being one of the Dividend Growth 50's income laggards to being one of its leaders.

In the second quarter of 2019, only the resurgent Kinder Morgan (KMI) - which recently had gone from the DG50's outhouse to penthouse - generated a larger year-over-year income gain on a percentage basis.

You can see in the above graphic that the increase in Deere's income from Q2 2017 to Q2 2018 had been only 1.83% - a gain that had been generated entirely by the fractional shares added via dividend reinvestment. Thanks to those two raises in a 7-month span, however, the DE position produced 29.23% more income in Q2 2019.

The jump in Deere's dividend, as well as significantly increased production from companies such as Automatic Data Processing (ADP), Wells Fargo (WFC), McDonald's (MCD) and Caterpillar (CAT), helped the DG50 to a more than 8% year-over-year income gain in Q2 2019.

While there's absolutely nothing wrong with 8% - indeed, I'd take it every quarter for the rest of my life - that is somewhat off the pace of the previous year when income grew almost 10%.

I guess that was to be expected, with many companies being a little less generous a year after big tax cuts had flooded corporations with extra dough. The Dividend Growth 50's overall income picture also was stunted by the major dividend reductions of Kraft Heinz (KHC) and General Electric (GE), with the latter just about eliminating its payout.

In a minute, I will present the DG50's complete Q2 income growth report, but first...

How It All Started

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.

A couple of months later, I put $25,000 of my own money into an equally weighted portfolio of the stocks, and I dubbed the project the Dividend Growth 50. I since have written dozens of articles about it; one can check those out by perusing my SA page. (They also have been documented by DG50 panelist Eric Landis in his blog, DGI For The DIY.)

My DG50 work is not intended to be a recommendation that others re-create the portfolio in its entirety or buy any of its components. Perhaps this article (and comment stream) will provide insights into Dividend Growth Investing concepts, as well as interesting candidates for folks to research further.

Also, note that this report is almost exclusively income-related. Each December, on the anniversary of the portfolio, I thoroughly examine the total return.

Without further ado, here is a look at the DG50's income growth in the April-June period of 2019 compared to the second quarter of 2018:

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

Notes

The figures in the table reflect the actual cash dividend paid into the DG50 by each company in each quarter. So, how is it possible that the Chevron (NYSE:CVX) position's income grew by 10.45% year over year even though the company raised its dividend by only 6.25%, or that the HCP (NYSE:HCP) holding's income grew by 5.70% even though the firm hasn't raised its dividend in five years?

Credit the wonders of compounding.

Because portfolio rules demand that dividends be reinvested - a process also known as "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!

The DG50 actually includes 51 companies, as Baxter International (BAX) spun off Baxalta, which was acquired by Shire (NASDAQ:SHPG), which early this year was bought by Japan's Takeda Pharmaceutical (TAK). Takeda doesn't pay a dividend.

In addition to getting 5.321 shares of Takeda in the deal, the DG50 received $96.18 in cash. After combining that money with the cash the portfolio got for a different acquisition last year, I bought two additional shares of Baxter.

Although the DG50 is intended to be a passive, buy-and-hold exercise, portfolio rules state that merger-and-acquisition activity "will be handled on a case-by-case basis." I thought using the cash to buy more shares of the company that originated most of the activity seemed logical.

As a result of that - and of Baxter's 16% dividend growth - the BAX position produced 20% more income in Q2 2019 than it did in Q2 2018.

In all, 19 positions had bigger income gains in the last year than in the previous 12 months.

Wells Fargo, the beleaguered bank that seemingly has jumped from one scandal to another the last several years, had been miserly with its dividend. So it was quite surprising in January when the company announced a hike to its quarterly payout from .43 to .45 - just six months after it had raised the dividend from .39 to .43.

Chart Data by YCharts

That total raise of more than 15% helped the DG50's Wells Fargo position increase income by 19% from Q2 2018 to Q2 2019 after only a 5.8% increase over the previous year.

Another big improvement was turned in by Caterpillar, which saw a nearly 13% increase this time after a less than 4% gain from Q2 2017 to Q2 2018. It's nice to see CAT keeping up with rival Deere in that department. (Or was DE keeping up with CAT?)

On the downside, 3M (MMM), Pepsi (PEP), Aflac (AFL), Qualcomm (QCOM), Apple (AAPL) and Clorox (CLX) produced significantly lower income in Q2 than in the same quarter a year ago.

Apple's conservative 5.5% dividend raise, announced May 1, was especially surprising, given how easily the company's free cash flow has covered its dividend. (Graphic below from McLean Capital Management.)

Omega Healthcare (OHI), long a darling of DGI practitioners for its 22 consecutive quarters with dividend raises (from Q4 2012 through Q1 2018), addressed cash-flow issues by freezing its dividend at .66 the last 6 quarters.

Nevertheless, dripping the high-yielding company adds plenty of new shares and that results in nice income growth despite the freeze. So while double-digit percentage growth is no more, 8.7% is nothing to sneeze at.

Oh, and while this DG50 report is dealing predominantly with income, it's worth noting that OHI far outperformed the overall market this past year.

Chart Data by YCharts

After having been one of the DG50's top income producers, Kraft Heinz (NASDAQ:KHC) has fallen on hard times. With debt mounting, the company slashed its dividend by 36% earlier this year.

As bad as that was, it's nothing compared to the carnage over at GE, which cut its dividend in half for 2018 and then followed that up by lowering it to a single penny per quarter for 2019.

Given that this wasn't exactly a first for GE - its infamous slash-and-burn act during the Great Recession earned the ire of many investors - I'm guessing that this was one pick some DG50 panelists wish they had back. It's hard to argue that General Electric belongs in any DGI portfolio.

Time To Go Shopping?

The market is up big so far in 2019, the bull run is in Year 11, and most DG50 companies appear to be overvalued. In my personal account, I certainly am not doing much buying these days. Having said that, there's always something "on sale."

According to Simply Safe Dividends, some might consider the following to be undervalued because their current dividend yields are at least 10% higher than their historic yields.

Many of those companies are having problems related to fundamentals, business models, projected earnings and sales, litigation or other issues. So much depends upon potential investors' projections of operations going forward.

Believe it or not, I find KMI to be kind of intriguing right now. Its business is functioning as intended, and the company is back to aggressively raising its dividend. I haven't been adding to my personal stake except through dripping, but I'm not selling, either.

For those who don't have an aversion to big banks, Wells Fargo could be an interesting comeback play.

Few income investors can quibble too much with Dominion (D), a solid utility with an attractive yield. Do be aware, however, that company executives are projecting considerably lower dividend growth in the coming years, as D tries to reduce its payout ratio.

Valuation-related cases also could be made for the likes of Apple, Deere, Lockheed Martin (NYSE:LMT), Verizon (NYSE:VZ), Target (NYSE:TGT) and even good ol' Johnson & Johnson (NYSE:JNJ).

Conclusion

The dividend reductions of GE and Kraft Heinz serve as a reminder that nothing is guaranteed in the wacky world of stock investing.

However, those unkind cuts also remind us that a diversified portfolio of high-quality, dividend-growing companies can overcome the problems of a few deadbeats. Fact is, 96% of the DG50's dividend-paying companies did not reduce their distributions to shareholders, and most grew them quite nicely.

I remain confident in the Dividend Growth 50's ability to produce a reliable, predictable, increasing income stream for years to come.

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.