A Six-Pack of Growing Dividends

07/18/2013 7:00 am EST

Focus: STOCKS

David Dittman

Chief Investment Strategist, Australian Edge, Canadian Edge, & Utility Forecaster

Building wealth through a portfolio of dividend-paying stocks requires a plan. A key part of the approach we bring to dividend investing is establishing and sticking to value-based, buy-under targets, says David Dittman in Personal Finance.

We avoid chasing stocks that have run beyond these levels. We boost targets primarily based on dividend growth but also on other factors, such as asset additions, that promise dividend growth in the future.

Another component of our approach is a long-term focus. We're mindful of short- and medium-term market moves, but our buy-hold-sell decisions are rooted in what underlying operating and financial metrics say about dividend sustainability and growth well into the future.

Here's a look at six solid companies with sustainable and growing dividends.

Dominion Resources (D) is one of the largest producers and transporters of energy in the US, with a portfolio of approximately 27,500 megawatts of generation, 11,000 miles of natural gas transmission, gathering and storage pipeline and 6,300 miles of electric transmission lines.

Dominion has been a reliable power provider operating in the stable regulatory environment of Virginia.

Key to the company's long-term growth prospects as power demand flat-lines is the Cove Point LNG lique­faction plant, which is on the short list for approval of exports to non-free trade countries by the US Dept. of Energy.

A drop-down of this asset into a master limited partnership (MLP) could unlock significant value for Dominion shareholders.

The company's share price has bounced back from a late-spring selloff. Dominion Resources is a buy on dips to $55.

Exelon Corp. (EXC) had warned for months that a dividend cut was coming before it finally made the move in early 2013. The cash saved will help the company wait out a return to normalcy for wholesale power prices.

In addition, new rules on carbon emissions will help Exelon, which controls 20% of US nuclear generating capacity.

Unlike the natural gas-fired power plants they compete with, Exelon's nukes have a record of stable opera­tions and fuel costs spanning decades. And they emit no carbon dioxide (CO2).

A tax on CO2 or tighter regulation of emissions would boost the cost of gas-fired power overnight. So will eventual export of North American liquefied natural gas, cou­pled with surging demand at home.

Power prices would also likely surge back to normal levels and give a significant lift to Exelon's margins on sales. Exelon is a buy under $35.

Kinder Morgan Energy Partners LP (KMP) management recently announced distribution increase to $1.30, up 8.3% from $1.20 a year ago and the 33rd increase since January 2003.

First-quarter distributable cash flow per unit of $1.43 beat the consensus analyst estimate, due to a combination of lower interest costs, and lower maintenance CAPEX. Distribution coverage for the period was 1.06 times.

In May, the MLP completed its $5 billion acquisition of Copano Energy LLC, which will be immediately accretive to cash flow. Kinder Morgan Energy Partners LP is a buy under $88.

ONEOK (OKE) announced in mid-June 2013 that it would shut down its energy services segment sooner than expected.

ONEOK expects to record a non-cash writedown of about $75 million in the second quarter, due to the release of contracts for such sales. The company also expects pre-tax operating losses of $55 million in 2013 and $15 million in 2014.

But management expects the cash impact of the accelerated winddown to be "slightly positive" overall in 2013 because the segment will forego the majority of its previously planned natural gas injections.

ONEOK expects "no change" to its three-year net income and dividend-growth forecast out to 2015, making this a proverbial "addition by subtraction" that will help the company focus on profitable operations. ONEOK is a buy under $50.

Southern Company (SO) remains ripe for picking by value-focused investors. Concerns about cost overruns at its Vogtle nuclear power plant project, as well as the implications of a new Dept. of Energy order to upgrade vents at existing nuclear plants have also weighed on sentiment toward Southern.

However, the utility operates amid an extremely favorable regulatory environment in its core Southeast territory. Southern Company is a buy under $45.

TransCanada Corp. (TRP) will be neither made nor broken by the Obama administration's ultimate decision on the Keystone XL project.

The controversial project is an important growth initiative, but it's just one aspect of an otherwise healthy and growing energy infrastructure company with pipelines as well as power generation assets.

TransCanada has announced a dividend increase along with first-quarter results every year since 2004. During this time, the quarterly payout has grown from CAD0.27 per share to CAD0.46. Buy TransCanada up to $47 for long-term growth and income.

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