Happy July!

I hope you all had an enjoyable holiday weekend celebrating Independence Day. For me, it was a welcome break from the grind of the office, and some good quality time with family and friends. We were able to do some hiking at our local state park on Friday and had a small outdoor get-together with some friends on the 4th as we enjoyed some fireworks and good food.

As I mentioned last month, life has gotten much busier as we’ve progressed into the summer months. The boys did end up having baseball this summer (with social distancing), which means shuttling them across town four nights a week for games. It can make for some hectic evenings, but it’s so much fun watching them learn and reach new milestones with their skills.

I’ve also been keeping busy with the garden, and now that I’m getting blossoms on the tomato and cucumber plants, it should be just a week or two longer until we get to start enjoying the fresh goodies for our meals.

June Dividend Income

Speaking of goodies, June was an excellent month for fresh dividends in the portfolio, as it set a new monthly record for income.

Dividend income came in at $367.14, which was a 26.7% increase over 2019’s total.

With thirty-one companies making payments, June is definitely one of the busy months for the portfolio. Not only was it busy with the number of payments, but there were plenty of moves made during the last year that muddles things up a bit as well.

The Gilead and Ross Stores positions were both liquidated, bringing their income down to zero. Microsoft and Digital Realty Trust were also trimmed during the year, causing their produced income to drop.

Add-on buys in Chevron, Flowers Foods, Johnson & Johnson, 3M Company, NextEra Energy, UnitedHealth Group, Wells Fargo, and Exxon Mobil caused their income to rise substantially. However, there were several other companies that provided double-digit income growth all on their own.

The biggest growth came from Visa at 20.4%, while Cummins also produced an impressive 18.7% growth rate from a combo of a 15% dividend increase and dividend reinvestment at a 3%+ yield. Other companies that produced double-digit growth included Amgen, American Water Works, Home Depot, Lockheed Martin, McDonald’s, Norfolk Southern, Union Pacific, and WEC Energy.

Not all was good as there were a few laggards in the group. The worst was Becton Dickinson, which produced just a 3.7% increase in income. IBM, STAG Industrial, and Target all grew income by less than 6% as well.

June Dividend Increase Announcements

As expected, June was a relatively quiet month for dividend increase announcements. There were just three increase announcements made, coming from UnitedHealth Group Inc. $UNH, Realty Income Corp. $O, and Target Corp. $TGT.

UnitedHealth Group announced a healthy 15.7% increase on June 5. This is an impressive raise but is actually the smallest percentage increase since 2012. The $5.00/share rate is just over 30% of expected 2020 earnings of $16.40, which falls in line with company guidance for payout ratio.

This company is one of my favorites for long-term growth potential, and although the days of 20%+ increases may be over, I do expect double-digit earnings and dividend growth for the next several years.

Realty Income surprised me with a small increase of 0.21%, which when added to other increases over the year gives a 3.09% annual increase. With a raging pandemic causing all sorts of problems in commercial real estate, this seems like a big vote of confidence from the company. It appears to me that the “Monthly Dividend Company” will do all it can to keep that dividend intact and growing.

Target’s increase, while small, is still a positive sign considering their earnings are expected to drop by 22% in 2020. It could have easily given a token penny raise, or even froze the dividend like many others in the sector, but went with two cents on the raise. After seeing Ross Stores and TJX suspend dividends, I think Target deserves some credit for giving a raise on schedule.

Expected July Dividend Increases

There are a handful of companies that typically announce increases during the month of July. With a few of those being in the industrial sector, it will be interesting to see how things play out later this month.

Walgreens Boots $WBA already announced its increase, raising the dividend by a penny from $0.4575 to $0.4675, an increase of 2.1%. Like Target, it was good to see Walgreens come through with an increase despite difficulties in their business. Earnings are expected to drop more than 20% in 2020, so to get an increase at all is a positive.

The next expected increase comes from Cummins Inc. $CMI, which typically announces an increase during the second week of July. Cummins raised the dividend by 15% last year, but earnings are being hit hard this year by the recession, with analysts currently projecting a 52% drop. My prediction is a small raise from $1.311 to $1.35, which would be a 3% increase.

Railroad operators Norfolk Southern Corp. $NSC and Union Pacific Corp. $UNP are the other two stocks with typical July raises, and they too are being impacted by the COVID recession. Union Pacific’s earnings are predicted to drop by 9%, and Norfolk Southern’s by 16%, which brings the payout ratios for both above guidance.

Neither company has followed a strict schedule with raises, and Norfolk Southern went more than a year between raises as recently as 2016. With ongoing questions about the economy and earnings, I expect both to stand pat with their current payouts. If they do increase, I would be surprised with anything more than a penny or two raise.

Expected Dividend Cuts

Not all news was good on the dividend front, as one company announced a dividend cut, and another will likely do so next week.

On July 5, Dominion Energy $D announced a deal with Berkshire Hathaway in which it would sell off its gas transmission and storage assets along with a share of its Cove Point LNG export facility. This deal will reduce Dominion’s risk profile as it reduces debt and the market fluctuations associated with operating midstream assets. However, it also lowers earnings and cash flows, which will result in a lower dividend payout in 2021.

Dominion expects the dividend will be cut from the current $3.76 to around $2.50, a 33% drop. It will then target a 65% payout ratio going forward, and it expects to grow the dividend at a 6.5% rate. This is in line with some other utility companies I own, Excel Energy $XEL and WEC Energy $WEC.

While I’m disappointed in the cut, I do think the new Dominion will be a worthwhile investment. The $2.50 annual dividend gives a yield of 3.4% at its current price, which when combined with a 6.5% growth rate (if guidance is worthwhile) makes it an appealing utility candidate.

I sold off roughly 1/3 of my stake and will continue to hold the rest, which allowed me to make up for the lost income with other stocks, while also maintaining a stake for its future potential. This brings my weighting in the stock down to similar levels of XEL, WEC, NEE, AWK, and recently purchased SRE.

Wells Fargo $WFC is also expected to announce a dividend cut when it releases earnings this week. The Fed’s mandate that dividends can’t exceed a bank’s prior four quarters of earnings means WFC faces a near-term cut, and potentially another cut in the future.

Analyst estimates are currently expecting just $0.66 in earnings in 2020, so as the profitable quarters from 2019 roll off and are replaced by lower earnings this year, the mandate that dividends can’t exceed earnings will start to make an impact. I wouldn’t be surprised if the dividend is suspended entirely by the year’s end.

COVID-19 is far from over, and as fiscal and monetary stimulus ends in late July, I think there could be another surge in layoffs. This will impact Wells Fargo’s earnings even further as businesses and individuals struggle to make loan payments.

In the end, there was too much uncertainty for me to want to hold the stock through earnings.

Recent Dividend Growth Articles

After several months of off and on work, I was finally able to get my article on the Healthcare sector finished up and published on Seeking Alpha last week. This article presented my updated twenty-five stock watch list on the sector and selected my top ten picks for income and total returns.

Top Ten Healthcare Stocks For Dividend Growth And Income

I think the article turned out great, and the feedback received was very positive. There are some great opportunities in the sector, and despite a bit of uncertainty with the upcoming election, the sector as a whole is one that should continue to grow despite the pandemic.

In addition to the top ten article, I’ve also updated my healthcare watch list page on this site. It includes a live table of the spreadsheet, and also a PDF download link for those who like to do some studying. Please let me know if you find this useful and helpful, as I’d like to know if the effort to keep it updated is worth it.

Expanding out to other writers I follow, here as some articles that stood out to me over the past month.

The first is an update from David Van Knapp which highlights The Highest Quality Dividend Growth Stocks in the market. The article provides Value Line safety and financial strength ratings, S&P credit ratings, Morningstar’s moat rating, and Simply Safe Dividends’ dividend safety grade for stocks on the Dividend Champions, Contenders, and Challengers list. The list is an excellent resource and helpful information for anyone looking for ideas on building a portfolio of high-quality stocks.

The second comes from Mike Nadel, who is writing about his plan to build a college fund for his two grandsons. The Grand-Twins College Fund should be a fun series to follow, as Mike does a great job of explaining his reasoning behind his picks, and explains how he went approached the effort.

Another article that stood out to me came from DoctoRx on Seeking Alpha, who shared his medical thoughts on the pandemic, the potential for a Second COVID Wave, and what that means for investments. He then shares the sectors and other investment opportunities worth looking into.

Closing Thoughts

The pandemic continues to make an impact on the economy and the market, and that continues to have an impact on dividend payouts by companies. The initial hit was to restaurants, airlines, and entertainment stocks, and the banks now appear next in line to suffer dividend cuts.

So far I’ve been able to manage the portfolio to stay ahead of the cuts and avoid any actual loss in income, as evidenced by the 26.7% income growth in June and the 14.3% dividend income growth through the first half of the year.

The pandemic and recession have definitely driven home the point that one needs to be diversified and own high-quality stocks. With a 50-stock portfolio, a dividend cut by a single stock has a fairly small impact on the overall portfolio income, and can easily be managed by trading it out for other ideas. Dividend reinvestment and raises by other positions in the portfolio also act to counter those losses and help keep the portfolio goals of 10% annual income growth intact.

I hope you all are having an enjoyable summer. Happy Investing!