3 Dividend Stocks for July 2023

David Harrell: Hi. I’m David Harrell with Morningstar Investment Management. In this monthly video series, we take a look at the dividend prospects of three stocks that are popular with income investors.

3 Dividend Stocks for July 2023

1. 3M MMM
2. AT&T T
3. Plains GP Holdings PAGP

First up this month is 3M. This industrials conglomerate yields around 6%, with 4.9% annualized dividend growth over the past five years, and the company can point to more than 50 years of consecutive annual dividend increases. However, Morningstar analysts expect that the company’s earnings will decline in 2023, and they recently increased their Uncertainty Rating from High to Very High, following the announcement that 3M is paying $10.3 billion to settle lawsuits over claims that its “forever chemicals” had contaminated water supplies. Morningstar analysts had previously noted that “the dividend could be at risk if 3M needs to fund significant litigation settlements” and they believe that the settlement, along with an upcoming healthcare spinoff, could pose a threat to the dividend.

Next up is AT&T, another longtime dividend-payer. AT&T used the WarnerMedia spinoff to reset its dividend in 2022 and now targets to pay out around 40% of its free cash flow, down from around 70%, according to Morningstar calculations. As Morningstar analysts noted, “AT&T’s capital structure simply didn’t line up well with a large dividend payout. Yet management explicitly expressed support for the prior dividend rate until immediately before changing direction, catching long-suffering investors off guard.” Despite the reduction in the quarterly dividend rate to 27.75 cents, down from 52 cents, the stock currently yields 7%, and the new dividend rate should allow AT&T to reduce its debt. As for future dividend growth, it went unmentioned in the company’s last two earnings calls. Given the current yield, we believe a near-term dividend increase seems unlikely.

Finally, our last name this month offers investors a choice in how they want to be taxed: Plains GP Holdings, trading under the ticker symbol PAGP, is a limited partnership that has elected to be taxed as a corporation for U.S. income tax purposes and is therefore appropriate for both taxable and tax-deferred accounts. It’s the general partner to Plains All American Pipeline, which trades under ticker symbol PAA, and is structured as a master limited partnership, or MLP. Investors in either entity receive the same payout each quarter, with dividends received from the PAGP shares treated as qualified dividends for tax purposes, while distributions from the PAA units are considered a return of capital. They’re untaxed but also result in an adjustment to an investor’s cost basis, which can mean higher taxes down the road, and aren’t recommended for a tax-deferred account such as an IRA.

Plains’ five-year annualized dividend growth remains in negative territory following a 50% distribution cut in 2020. But two subsequent raises—a 21% increase in 2022 and a 23% increase this year—have erased a large portion of the cut and have pushed the stock’s yield above 7%. Even if management’s goal of a $0.15 increase in the annual distribution isn’t attainable, Morningstar analysts still expect double-digit distribution growth on a percentage basis over the next few years.

I’m David Harrell with Morningstar Investment Management. Thanks for watching, and we’ll see you next month.