Diversified Stock Income Plan

Transcription

1 Kent A. Newcomb, CFA, Equity Sector Generalist Joseph E. Buffa, Equity Sector Generalist Diversified Stock Income Plan April 2013 Commentary from ASG's Equity Sector Generalists Quarterly Review The Diversified Stock Income Plan (DSIP) is a closely monitored list of stocks chosen because of the likelihood of the companies to consistently raise annual dividends. Our goal is to find stocks with attractive current yields that have the potential to provide a growing stream of income over time while taking into consideration company fundamentals. The stocks on the list are categorized according to market sector to facilitate construction of a well-diversified portfolio across various industries. With a package of such stocks, we are seeking a relatively low risk way to help conservative income and growth-oriented equity investors to potentially keep up with the rising cost of living. Primary DSIP objectives Our main objective in DSIP is to provide a list of stocks from a variety of different industries across all ten Standard & Poor s (S&P) market sectors that we think have the potential to increase dividends with regularity, and that allow investors to build a well-diversified portfolio of dividend growth stocks. Other objectives include: 1) Potentially provide a higher stream of income over time. With a diversified package of stocks that we believe have the potential to raise their dividends with regularity, conservative, income and growth-oriented equity investors should have the potential to keep up with the rising cost of living. To help achieve this goal of a growing income stream, we recommend that investors plan to hold these stocks for an extended period, typically a minimum of five years. 2) Help to modify risk through diversification. A well-constructed portfolio typically contains stocks from different market sectors. Studies have shown that stocks in as few as six sectors with different investment characteristics can help reduce a portfolio's risk, as measured by standard deviation, to roughly that of the marketplace in which the stocks are traded. (Standard deviation measures the volatility of stock prices.) Please see Figure 1 for general diversification guidelines. 3) Keep you informed about these stocks through your financial advisor. We notify our financial advisors whenever a stock on the DSIP list raises or lowers its dividend, if we add a stock to or delete a stock from the list, or if any other significant events occur. We also publish quarterly and annual updates summarizing activity in the Diversified Stock Income Plan as well as other reports on topics of interest. Figure 1 Diversification Guidelines Roughly 20 to 30 stocks in at least six to eight sectors with different investment characteristics; No more than 20% of the total portfolio value in any one sector; No more than 10% of the total portfolio value in any one stock; Although diversification is an important tool for helping to reduce risk, having a large number of individual stocks in your portfolio makes it increasingly difficult to monitor each security s progress. Diversification does not guarantee a profit or protect against loss in a declining market. Source: Wells Fargo Advisors Please see page of this report for Important Disclosures, Disclaimers and Analyst Certification

2 No one has control over what stock prices do. But, if we can invest in companies for which we have reasonable confidence that their products and services will remain in demand in both difficult and favorable economic times, thereby having the potential to consistently increase earnings and dividends, over time stock prices should have the potential to increase also. In addition, rising dividends have historically tended to cushion the fall of stock prices in challenging markets. If one can lose less money in down markets, one shouldn t have to work as hard to make it back in up markets. Obviously there are no assurances that stock prices will rise or that dividend income will increase, so it's important to realize that stock prices could drop and dividends could be reduced or eliminated. History has shown that investing in stocks of good quality companies has been an important strategy designed to help investors build wealth over time, although there is no guarantee that this will be the case going forward. Getting paid cash dividends up to four times a year with the prospect of dividend increases at least once a year from a properly diversified portfolio should, we hope, help investors get in and stay in the market to participate in the wealth-building potential of good quality common stocks, even in uncertain or volatile markets. We consider the potential for consistent dividend increases to be tangible evidence of the high caliber of the companies on the DSIP list. The DSIP strategy emphasizes owning pieces of great businesses. Try to ignore the stock market and instead focus on the companies, many of which have products or services that most readers know and patronize, and that pay growing dividends while waiting for stock prices to reflect the direction of earnings over the long term. Our analysts have scrutinized the dividend stability and long-term growth potential for every company on the list. The DSIP list, therefore, includes only the stocks of those companies for which we believe the likelihood for regular dividend increases is high and which we consider appropriate for long-term income and growth-oriented investors with a multi-year investment horizon. Some investors can be cavalier about dividend growth but, in fact, it is no small feat for a company to be able to increase its dividend with regularity. As shown in Figure 2, the number of dividend increases from a broad universe of publicly traded companies decreased substantially from a peak in 2006 to the trough in Over that period, the number of dividend increases declined from 1,969 to 699, a reduction of 64%. Over that same time period, the number of dividend cuts and omissions rose dramatically from 87 to 804, an increase of over 800%! Figure 2 Standard & Poor s Dividend Action Report Increases Decreases & Omissions Jan Feb Mar Apr May June July Aug Sept Oct Nov Dec Year 1,745 1,949 1,969 1,857 1, ,087 1,434 1, Q % Change 17% 5% -1% -24% -59% 47% 45% 34% 33% -12% 13% 12% 337% 342% -87% -38% 3% 348% Dividends can be increased, decreased or totally eliminated at any point without notice. Sources: Standard & Poor s, Wells Fargo Advisors Page 2 of 15

3 Looking a bit more narrowly at just the companies in the S&P 500 index (see Figure 3), one can see that in 1980, 469 of the 500 companies (94%) paid some kind of dividend. The percentage of dividend payers dropped steadily until , when this metric hit a low with just 351 of the S&P 500 members (70%) paying a dividend; coincident with the peak in the market s tech bubble. The percentage of dividend payers steadily rebounded from the 2002 lows to 78% in 2007 (390/500), before declining again in the recession. In the current low interest rate environment, where dividend income has become increasingly popular with investors, the number of dividend payers and dividend growers now exceeds the 2007 level. But, in our opinion, it will likely take some time to return to the prior (1980) peak. Figure 3 S&P 500 Dividend Payers : 406, 81% 95% 90% 85% 80% 75% 70% 65% 60% S&P 500 Dividend Payers (left axis) % Total (right axis) Sources: Standard & Poor s, Wells Fargo Advisors DSIP list criteria The analysts who choose stocks for DSIP utilize a disciplined philosophy and methodology that focuses upon finding companies that: appear fundamentally sound (i.e., in solid financial condition with investment grade debt, if they have debt), have historically paid dividends well-covered by free cash flow, operate generally mature, defensive businesses (i.e., providing products or services that customers tend to patronize in all kinds of economic environments), and most importantly, offer the potential to consistently raise their annual dividends. We prefer companies that pay cash dividends out of after-tax earnings. Rarely are we attracted to companies that maintain or increase their dividends through the use of money either borrowed or generated from activities outside the company s primary business of producing goods or services. We look for companies that, in addition to increasing their earnings year after year, also generate growth in free cash flow, or more cash than is required by the company to pay its bills (e.g., wages, raw material costs, advertising expenses, taxes, etc.), maintain its property, plant and equipment, etc. It is our primary objective to add only what we believe are the highest quality companies with the potential for consistent annual dividend growth; and then to patiently hold them for an extended period of time, throughout economic and market cycles, selling only if the fundamental characteristics of the Page 3 of 15

4 company have changed materially, and presumably permanently for the worse. Consequently, we are not likely to include every stock within a particular market sector that meets the basic criteria for inclusion on the DSIP list. We aim to include on the DSIP list only those companies that are clear industry leaders, and those with the strongest financial condition and outlook for sustainable dividend growth. Figure 4 DSIP Sector Diversification (Q1 2013) Consumer Discretionary 8.1% Consumer Staples 17.6% Energy 8.1% Financials 8.1% Health Care 10.8% Industrials 10.8% Information Technology 13.5% Materials 6.8% Telecommunication Services 1.4% Utilities 13.5% Source: Wells Fargo Advisors Proper diversification is extremely important It is our opinion that a properly diversified DSIP portfolio should contain companies from a number of different sectors, and different business types within the sectors. Diversification does not guarantee a profit or protect against loss. It can, however, help reduce the volatility of a portfolio as measured by its standard deviation. The sector weightings of the DSIP list at the end of the March 2013 quarter are presented in Figure 4 above. Investors looking for high current income may find better yields than DSIP has to offer in fixed-income securities or other investment types. But, to capture the potential for growing income, it is typically necessary to consider dividend paying equities as part of an overall asset allocation strategy. For DSIP purposes, we consider a stock that offers merely a good dividend yield but has no potential for dividend growth to be a relatively unattractive investment. A high-quality bond with a similar yield may offer a better return with less risk. We understand the thirst for yield, but advise caution against confining a portfolio to only the highest yielding investments. Remember that yields significantly greater than the prevailing rate on U.S. Treasury securities frequently signal a higher degree of risk, including the risk that the dividend may not be sustainable. Some investors are comfortable owning only one kind of stock perhaps a company or industry they know well or a group which, in the past, has been fairly stable and predictable in its results, such as utility stocks. Utilities, after all, have typically enjoyed a dependable cash flow stream because customers in its service territory write a check each month in order to receive the service the utility provides. Regulatory changes, however, and other competitive factors have affected the monopoly status of local utilities, further emphasizing the need for selectivity in investment choices, and the wisdom of diversifying beyond utility stocks. Page 4 of 15

5 Removing stocks from the DSIP list Most successful stock investors set emotions aside, and seek to patiently build wealth over time. Our hope is that through a very disciplined process for adding stocks to the DSIP list, we rarely have to consider their removal. However, companies evolve and markets are dynamic, sometimes requiring that we remove a stock from the list. The main reason we will remove a stock is because we are no longer comfortable with the company s prospects for consistent dividend growth. This will typically happen when the criteria we look at to add a stock begin to deteriorate, or are expected to do so. Examples would include an unsustainably high payout ratio (dividends/earnings per share), prolonged weakness in earnings growth, or deteriorating balance sheet strength. We rarely remove a stock solely for valuation reasons, although we are not opposed to clients strategically realizing capital gains in particular stocks if and when it makes sense in individual portfolios. DSIP is suitable for many investors The Diversified Stock Income Plan is considered appropriate for long-term conservative equity investors seeking some income and growth from their equity portfolios. It may also be appropriate for more aggressive investors who prefer to keep a portion of their portfolios in more conservative equity securities. Young investors can potentially benefit from decades of dividend growth and reinvestment. Investors looking to build or rebuild their retirement accounts may find the DSIP strategy appropriate. Retired individuals may benefit from the possibility of receiving annual dividend increases. The decision as to whether a particular security is suitable for an individual client s portfolio should be made by investors and their financial advisors, with full consideration given to existing portfolio holdings. Consider dividend reinvestment One way to potentially enhance total return is to reinvest cash dividends to buy more shares of stock. A dividend reinvestment program allows for automatic reinvestment of dividends into additional shares of the stock. If the dividends are reinvested on a day when the share price is low, more shares are purchased. A systematic investment plan does not guarantee a profit or protect against loss in a declining market, and investors should consider their ability to continue investing through periods of low price levels. If the dividends are reinvested on a day when the share price is high, fewer shares are purchased. We believe investors who reinvest dividends, as well as investors who want to initiate or add to stock positions, should welcome market pullbacks. Ask your financial advisor about dividend reinvestment, a service that allows you to more fully take advantage of the growth potential of your dividend income. We realize that you might choose to take delivery of cash dividends. Please understand, however, that you will not have the opportunity to take advantage of the compounding effect of dividend reinvestment, which will affect your total return. Investment risks As with any investment strategy, there are risks associated with investing in DSIP stocks. There will be times when dividend paying stocks are out of favor relative to other investment themes. For example, coming out of a recession, stocks that are more cyclically tied to a rebound in economic growth may outperform the generally defensive names on the list. As DSIP stocks are predominantly large-cap in nature, there will be times when small company stocks outperform those on the DSIP list. Our methodology for choosing DSIP list stocks focuses on high quality dividend growers. For various reasons, some market sectors will have more companies that meet the DSIP criteria for inclusion than others (e.g. utilities). Consequently, there will be times when the market favors sectors not as heavily represented on the list as others. In general, the defensive nature of the DSIP list tends toward underperformance in rapidly rising markets, and relative outperformance in down markets, given the downside cushion provided by rising dividends. Additions to the DSIP list Q There were no additions to the DSIP list during the first quarter. Deletions from the DSIP list Q On February 1, we removed the shares of Johnson Controls Inc. (JCI) from the DSIP list due to our decreased confidence in the company s ability to provide consistent annual dividend growth. Page 5 of 15

6 Overall, Johnson Controls financial position has deteriorated. As of the end of 2012, JCI s net debt to total equity was 52% compared to the company s 5-year average of 39%. Higher debt levels are a function of weak business conditions and higher capital requirements. Capital expenditures, typically $ million per year, ballooned to $1.3 billion in 2011 and $1.8 billion in Internal operational issues and global economic weakness combined with higher capital expenditures have produced negative free cash flow for fiscal years 2011 and Dividend tally Q In Figure 5, we list chronologically the dividend increases announced during Q Over the course of the quarter, 25 companies on the DSIP list announced 26 dividend increases. The average of the 26 total DSIP dividend increases was 11.2% on an annualized basis. In Figure 6, we present the average dividend increase by year for the DSIP list and the S&P 500, as well as the corresponding inflation rate as measured by changes in the Consumer Price Index (CPI). Clearly, the average DSIP dividend increase over this time period has outpaced the change in CPI. Although past performance does not guarantee future results, we believe that holding a diversified portfolio of DSIP stocks can be a viable strategy to help investors potentially stay ahead of the rising cost of living. Figure 5 DSIP Dividend Increases (Q1 2013) Declaration Date New Annual Dividend Rate Year Earlier Annual Dividend Rate Annualized Increase Company Symbol Record Date Payable Date Q AptarGroup, Inc. ATR 1/17/13 1/30/13 2/20/13 $1.00 $ % Praxair, Inc. PX 1/23/13 3/7/13 3/15/13 $2.40 $ % Realty Income Corp. O 1/23/13 2/1/13 2/15/13 $2.17 $ % Energen Corporation EGN 1/23/13 2/15/13 3/1/13 $0.58 $ % Polaris Industries Inc. PII 1/31/13 3/1/13 3/15/13 $1.68 $ % Northeast Utilities 1 NU 2/5/13 3/1/13 3/15/13 $1.47 $ % 3M Co. MMM 2/5/13 2/15/13 3/12/13 $2.54 $ % Teva Pharmaceutical Industries Inc. TEVA 2/7/13 2/21/13 3/7/13 $1.24 $ % Commerce Bancshares, Inc. CBSH 2/8/13 3/6/13 3/25/13 $0.90 $ % Jack Henry & Associates, Inc. JKHY 2/11/13 2/26/13 3/12/13 $0.52 $ % Owens & Minor, Inc. OMI 2/12/13 3/15/13 3/29/13 $0.96 $ % Sigma-Aldrich Corp. SIAL 2/13/13 3/1/13 3/15/13 $0.86 $ % United Parcel Service Inc. UPS 2/14/13 2/25/13 3/12/13 $2.48 $ % NextEra Energy, Inc. NEE 2/15/13 3/1/13 3/15/13 $2.64 $ % Analog Devices, Inc. ADI 2/19/13 3/1/13 3/12/13 $1.36 $ % SCANA Corporation SCG 2/20/13 3/11/13 4/1/13 $2.03 $ % Wal-Mart Stores, Inc. WMT 2/21/13 3/12/13 4/1/13 $1.88 $ % Kimberly-Clark Corp. KMB 2/21/13 3/8/13 4/2/13 $3.24 $ % Novartis AG NVS 2/23/13 2/28/13 4/5/13 $2.53 $ % Nordstrom, Inc. JWN 2/27/13 3/11/13 3/22/13 $1.20 $ % The Chubb Corporation CB 2/28/13 3/15/13 4/2/13 $1.76 $ % Piedmont Natural Gas Co. PNY 3/6/13 3/25/13 4/15/13 $1.24 $ % General Dynamics Corp. GD 3/6/13 4/12/13 5/10/13 $2.24 $ % General Mills Inc. GIS 3/12/13 7/10/13 8/1/13 $1.52 $ % Realty Income Corp. 2 O 3/14/13 4/1/13 4/15/13 $2.175 $ % Air Products & Chemicals Inc. APD 3/21/13 4/1/13 5/13/13 $2.84 $ % 1 NU increased its dividend after 3 quarters. The increase over the previous quarter is 7.1%. 2 O increased its dividend after 2 months. The increase over the previous month is 0.2%. Source: FactSet, company reports, Wells Fargo Advisors Page 6 of 15

7 Figure 6 DSIP and S&P 500 Dividend Changes & Inflation DSIP S&P 500 Year Dividend Dividend Change Change CPI Change % 4.8% 2.6% % 4.6% 2.5% % 8.0% 3.4% % 4.0% 1.7% % 4.6% 1.7% % 1.7% 2.7% % -3.1% 3.4% % -1.4% 1.6% % 2.1% 2.4% % 8.2% 1.9% % 11.8% 3.3% % 14.4% 3.4% % 11.9% 2.5% % 9.4% 4.1% % 4.2% 0.1% % -21.0% 2.7% % 1.5% 1.4% % 16.2% 3.0% % 18.2% 1.7% Average: 9.9% 5.3% 2.4% Source: Federal Reserve Bank of St. Louis, Standard & Poor s, Wells Fargo Advisors Important Q1 DSIP list developments On January 31, Royal Dutch Shell plc (RDS.B) announced plans to increase its dividend by 4.7% starting with the dividend to be declared in May. The new rate is expected to be $0.90 per quarter ($3.60 per year) compared to $0.86 per quarter ($3.44 per year) currently. On February 14, PepsiCo Inc. (PEP) announced plans to increase its dividend by 5.6% starting with the dividend to be declared in June. The new rate is expected to be approximately $0.57 per quarter ($2.27 per year) compared to $ per quarter ($2.15 per year) currently. DSIP dividend payout ratios for 2012 In Figure 7, we present dividend payout ratios for DSIP list companies and longer term averages. Payout ratio (PO) is an important metric analyzed and monitored by the DSIP team. Calculated as dividends divided by earnings (dividends/net income), the payout ratio measures the percentage of a company s net earnings paid out to its shareholders in the form of dividends. Perhaps the most convenient way for investors to make this calculation on their own is to divide dividends per share by earnings per share (DPS/EPS). For example, a company that pays a dividend of $1.00 per share, on earnings of $5.00 per share, the payout ratio is 20% ($1.00/$5.00). Figure 7 illustrates the payout ratio for the companies currently on the DSIP list for the most recent fiscal year reported (2012 for most), along with average payout ratios for the prior 3-year, 5-year and 10-year periods. There is no right or wrong number when it comes to gauging a specific company s, industry s or market sector s payout ratio. Each is somewhat unique with regard to the allocation of capital among the many Page 7 of 15

8 competing alternatives (e.g., dividends, share repurchase, capital expenditures, acquisitions, etc.). From the standpoint of the DSIP strategy, and our primary focus on rising dividends, the lower the payout ratio the better, all other things equal, to allow for growth potentially in both the dividend and the payout ratio itself over time. DSIP analysts often use 50% as the maximum payout ratio that we normally like to see; but as shown in Figure 7, a number of companies (e.g., McDonalds, Kimberly Clark, Paychex) and industries (e.g., utilities) routinely exceed the largely arbitrary 50% payout barrier, and are comfortable doing so given the consistency of their earnings growth and free cash flow over time. Most companies have developed a range for their payout ratios with which they are comfortable, and these ranges are usually well-communicated to investors via quarterly conference calls, investor presentations, etc. A rising payout ratio can be a sign of trouble brewing within a company, particularly as the ratio gets closer to 100%. A company with a very high, and rising payout may be experiencing earnings shortfalls, and may be starving other parts of the business for capital needed to maintain its dividend. On the other hand, a rising payout may simply reflect an intentional effort on the part of a company s Board of Directors to return a higher percentage of earnings to its shareholders in the form of cash dividends. There is typically little or no divergence in the dollar amount of dividends reported, and actual cash paid out, i.e. cash dividends paid per share are a fact. Earnings, on the other hand, often bear little resemblance to actual net cash generated to pay dividends, given the plethora of non-cash accruals, adjustments, etc. (e.g. deferred taxes, depreciation, asset write-offs) that can impact reported EPS; i.e. earnings might better be classified as opinions, subject to wide interpretation and adjustment. As such, an unusually high payout ratio for a company in any given year may simply reflect an EPS number weighed down by non-recurring events (e.g., a write down of goodwill, an intangible asset on the balance sheet). After analyzing two separate data sources, with often vastly different EPS figures as the denominator of the payout ratio, Figure 7 represents the more conservative (i.e., higher payout) of the two data sets in our opinion. Real Estate Investment Trusts (REITs) will by definition report high payout ratios, as they are required to payout at least 90% of their net income to shareholders as dividends in order to qualify and maintain their tax advantaged REIT status. Note the payout ratios for Realty Income Corp. (O), the only REIT on the DSIP list (see the Financial sector in Figure 7) at this time. In addition, payout ratios for REITs are typically calculated as dividends divided by funds from operations (FFO), a measure of cash flow as opposed to earnings. How can you participate? If you would like to read more about the concept of investing in stocks with the potential for rising dividends to enhance total return, ask your financial advisor for our report titled The Importance of Total Return. There is more than one way to participate in the DSIP strategy. Your financial advisor can help you choose the way that is best for you. Please contact your financial advisor if you would like a copy of the DSIP program performance report. Page 8 of 15

9 Figure 7 DSIP Payout Ratios (%) 1-yr 3-yr 5-yr 10-yr Consumer Discretionary Lowe's Cos. LOW McDonald's Corp. MCD Nordstrom Inc. JWN Polaris Industries Inc. PII Target Corp. TGT VF Corp. VFC average: Consumer Staples Brown-Forman Corp. Cl B BF.B Clorox Co. CLX Colgate-Palmolive Co. CL Costco Wholesale Corp. COST General Mills Inc. GIS Kellogg Co. K Kimberly-Clark Corp. KMB McCormick & Co. Inc. MKC PepsiCo Inc. PEP Procter & Gamble Co. PG J.M. Smucker Co. SJM Sysco Corp. SYY Wal-Mart Stores Inc. WMT average: Energy ConocoPhillips COP Chevron Corp. CVX Energen Corp. EGN Phillips 66 PSX Royal Dutch Shell PLC ADS RDS.B Exxon Mobil Corp. XOM average: Financials AFLAC Inc. AFL Brown & Brown Inc. BRO Chubb Corp. CB Commerce Bancshares Inc. CBSH Eaton Vance Corp. EV Realty Income Corp. O average: Health Care Abbott Laboratories ABT Baxter International Inc. BAX Becton Dickinson & Co. BDX Johnson & Johnson JNJ Novartis AG ADS NVS Owens & Minor Inc. OMI Stryker Corp. SYK Teva Pharmaceutical Industries Ltd. ADS TEVA average: Page 9 of 15

10 Figure 7 DSIP Payout Ratios (%, continued) 1-yr 3-yr 5-yr 10-yr Industrials 3M Co. MMM Emerson Electric Co. EMR General Dynamics Corp. GD W.W. Grainger Inc. GWW Illinois Tool Works Inc. ITW Norfolk Southern Corp. NSC United Parcel Service Inc. Cl B UPS United Technologies Corp. UTX average: Information Technology Accenture PLC ACN Analog Devices Inc. ADI Automatic Data Processing Inc. ADP FactSet Research Systems Inc. FDS Harris Corp. HRS Intel Corp. INTC International Business Machines Corp. IBM Jack Henry & Associates Inc. JKHY Microsoft Corp. MSFT Paychex Inc. PAYX average: Materials Air Products & Chemicals Inc. APD AptarGroup Inc. ATR Ecolab Inc. ECL Praxair Inc. PX Sigma-Aldrich Corp. SIAL average: Telecommunication Services AT&T Inc. T average: Utilities MDU Resources Group Inc. MDU National Fuel Gas Co. NFG New Jersey Resources Corp. NJR NextEra Energy Inc NEE Northeast Utilities NU Piedmont Natural Gas Co. PNY SCANA Corp. SCG South Jersey Industries Inc. SJI Southern Co. SO Wisconsin Energy Corp. WEC average: DSIP list average: Source: FactSet, Wells Fargo Advisors Page 10 of 15

11 Appendix DSIP list as of 3/31/2013 Est Est Dividend Annual Annual Increases Consecutive 3/31/13 Annual Market Div EPS Date Since Annual Price Div Yield Cap Growth Growth* Added Pay Added Increases for Ticker ($) ($) (%) (mil$) (%) (%) To DSIP Cycle to DSIP Company CONSUMER DISCRETIONARY Nordstrom Inc. JWN , /17/06 Mar 6 4 Lowe's Companies Inc. LOW , /14/12 Feb 0 50 McDonald's Corporation MCD , /16/04 Mar 8 36 Polaris Industries PII , /8/02 Feb Target Corporation TGT , /20/06 Mar 6 41 V.F. Corporation VFC , /3/08 Mar 4 40 CONSUMER STAPLES Brown-Forman Corp. BF.B , /31/07 Jan 6 29 Colgate-Palmolive Company CL , /16/05 Feb 8 50 Clorox CLX , /16/05 Feb 8 36 Costco Wholesale Corp. COST , /25/08 Feb 4 7 General Mills Inc. GIS , /25/08 Feb 6 10 Kellogg K , /3/06 Mar 7 8 Kimberly-Clark KMB , /3/99 Jan McCormick & Company Inc. MKC , /31/07 Jan 6 27 PepsiCo Inc. PEP , /10/94 Mar Procter & Gamble Company PG , /23/98 Feb Smucker (J.M.) Company SJM , /3/08 Mar 5 15 SYSCO Corporation SYY , /6/97 Jan Wal-Mart Stores WMT , /21/04 Jan 9 39 ENERGY ConocoPhillips COP , /30/02 Mar 9 0 Chevron Corporation CVX , /22/02 Mar Energen Corporation EGN , /24/94 Mar Phillips 66 PSX , /2/12 Mar 2 0 Royal Dutch Shell plc RDS.B , /18/12 Mar 9 1 Exxon Mobil Corporation XOM , /11/95 Mar FINANCIALS AFLAC Inc. AFL , /1/06 Mar 7 30 Brown & Brown, Inc. BRO , /3/08 Feb 5 19 Chubb Corporation CB , /5/11 Jan 2 31 Commerce Bancshares CBSH , /18/97 Mar Eaton Vance EV , /12/01 Feb Realty Income Corporation O , /13/07 Monthly Page 11 of 15

12 Appendix DSIP list as of 3/31/2013 (continued) Est Est Dividend Annual Annual Increases Consecutive 3/31/13 Annual Market Div EPS Date Since Annual Price Div Yield Cap Growth Growth* Added Pay Added Increases for Ticker ($) ($) (%) (mil$) (%) (%) To DSIP Cycle to DSIP Company HEALTH CARE Abbott Laboratories ABT , /25/08 Feb 5 40 Baxter International Inc. BAX , /3/08 Jan 5 6 Becton, Dickinson & Co. BDX , /5/07 Mar 6 41 Johnson & Johnson JNJ , /25/08 Mar 4 50 Novartis AG ~ NVS , /16/05 Annual 8 16 Owens & Minor Inc. OMI , /21/06 Mar 7 15 Stryker Corporation SYK , /25/12 Jan 1 22 Teva Pharmaceutical Ind. Ltd ~ TEVA , /3/11 Mar 2 14 INDUSTRIALS Emerson Electric EMR , /30/93 Mar General Dynamics Corporation GD , /25/08 Feb 5 22 W.W. Grainger Inc. GWW , /10/06 Mar 6 41 Illinois Tool Works ITW , /2/05 Jan M Company MMM , /2/05 Mar 8 55 Norfolk Southern Corp. NSC , /31/03 Mar United Parcel Service, Inc. UPS , /7/07 Mar 5 4 United Technologies UTX , /20/01 Mar INFORMATION TECHNOLOGY Accenture Ltd. ACN , /25/08 Semi 5 6 Analog Devices Inc. ADI , /28/07 Mar 5 9 Automatic Data Processing Inc. ADP , /25/03 Jan 9 38 FactSet Research Systems FDS , /6/09 Mar 4 13 Harris Corp. HRS , /29/08 Mar 5 11 Int'l Business Machines IBM , /20/00 Mar Intel Corp. INTC , /20/07 Mar 6 8 Jack Henry & Associates Inc. JKHY , /11/99 Mar Microsoft Corporation MSFT , /5/12 Mar 1 9 Paychex Inc. PAYX , /7/01 Feb 9 2 MATERIALS Air Products and Chemicals APD , /5/06 Feb 7 31 AptarGroup ATR , /4/06 Feb 5 18 Ecolab Inc. ECL , /6/07 Jan 6 21 Praxair Inc PX , /15/06 Mar 7 20 Sigma-Aldrich Corporation SIAL , /25/03 Mar TELECOMMUNICATIONS AT&T T , /25/08 Feb 5 29 Page 12 of 15

13 Appendix DSIP list as of 3/31/2013 (continued) Est Est Dividend Annual Annual Increases Consecutive 3/31/13 Annual Market Div EPS Date Since Annual Price Div Yield Cap Growth Growth* Added Pay Added Increases for Ticker ($) ($) (%) (mil$) (%) (%) To DSIP Cycle to DSIP Company UTILITIES MDU Resources Group Inc. MDU , /23/99 Jan NextEra Energy, Inc. NEE , /10/94 Mar National Fuel Gas Co. NFG , /30/93 Jan New Jersey Resources NJR , /16/96 Jan Northeast Utilities NU , /7/04 Mar Piedmont Natural Gas Co. PNY , /30/93 Jan SCANA SCG , /8/02 Jan South Jersey Industries Inc. SJI , /29/04 Apr 9 14 Southern Company SO , /13/11 Mar 1 11 Wisconsin Energy Corp. WEC , /8/11 Mar 1 10 * For REITs, the number in the Est. EPS Growth column applies to estimated Funds From Operations (FFO). ~ Dividend does not reflect the foreign tax withholding. Royal Dutch Shell has two share classes (RDS.A, RDS.B). Dividends on both classes are paid in U.S. dollars. A foreign tax is withheld from the Class A shares but not from the Class B shares. Consult your tax advisor for details. Dividend and EPS growth estimates come from a variety of sources, including the analysts who choose stocks for DSIP. Source: FactSet Research Systems, Wells Fargo Advisors, company reports Page 13 of 15

14 IMPORTANT DISCLOSURES: For important disclosure information, please contact: Wells Fargo Advisors Attn: Advisory Services (Disclosure Information) One North Jefferson St. Louis, MO Or call by phone: (888) Please remember to specify the issuer(s) with respect to which you would like to receive disclosure information. ANALYST CERTIFICATION: The Analyst who prepared this report hereby certifies that the views expressed in this report accurately reflect his/her personal views about the subject companies and their securities. The Analyst also certifies that he/she has not been, is not, and will not be receiving direct or indirect compensation for expressing the specific recommendation(s) or view(s) in this report. Disclaimers Investing in foreign securities presents certain risks not associated with domestic investments, such as currency fluctuation, political and economic instability, and different accounting standards. This may result in greater share price volatility. These risks are heightened in emerging markets. Technology and internet-related stocks, especially of smaller, less-seasoned companies, tend to be more volatile than the overall market. There are special risks associated with an investment in real estate, including credit risk, interest rate fluctuations and the impact of varied economic conditions. Distributions from REIT investments are taxed at the owner s tax bracket. You should be aware that investments can fluctuate in price, value and/or income, and you may get back less than you invested. We recommend that existing shareholders consider their objectives, their risk tolerance, and the size of their positions relative to their portfolios when evaluating their holdings. Dividends are not guaranteed and are subject to change or elimination. Investments that are concentrated in a specific sector, industry, country or commodity increases its vulnerability to any economic, political, currency or regulatory development, which may result in greater price volatility. Page 14 of 15

15 Wells Fargo Advisors is a trade name for certain broker/dealer affiliates of Wells Fargo & Company; other broker/dealer affiliates of Wells Fargo & Company may have differing opinions than those expressed in this report. Contact your Financial Advisor if you would like copies of additional reports. Additional information available upon request. Past performance is not a guide to future performance. The material contained herein has been prepared from sources and data we believe to be reliable but we make no guarantee as to its accuracy or completeness. This material is published solely for informational purposes and is not an offer to buy or sell or a solicitation of an offer to buy or sell any security or investment product. Opinions and estimates are as of a certain date and subject to change without notice. Investment and Insurance Products: NOT FDIC Insured NO Bank Guarantee MAY Lose Value Wells Fargo Advisors is the trade name under which W Fargo & Company provides brokerage services through two registered broker-dealers: Wells Fargo Advisors, LLC, Member SIPC, and Wells Fargo Advisors Financial Network, LLC, Member SIPC. Each broker-dealer is a separate non-bank affiliate of Wells Fargo & Company Wells Fargo Advisors, LLC. All rights reserved. Page 15 of 15