2018 Second Quarter Review - Wells Fargo Advisors

1 October 16, 2020 Joseph E. Buffa, Equity Sector Analyst Jack Russo, CFA, Equity Sector Analyst Advice & Research Diversified Stock Income Plan Quarterly Review Third Quarter 2020 DSIP List Overview The Diversified Stock Income Plan (DSIP) List focuses on companies that we believe will provide consistent annual dividend growth over a long-term investment horizon. Our objective is to provide a broad list of high-quality, industry-leading companies from which an investor can assemble a well-diversified portfolio. Through consistent dividend growth, our goal is to help investors stay ahead of the wealth eroding effects of inflation. Summary During the first nine months of 2020, the DSIP List underperformed its benchmark, the S&P 500, on a total return basis. Our overweight towards more defensive stocks and sectors hurt the list for the first nine months of 2020 as risk-on assets (technology stocks in particular) benefited from monetary and fiscal stimulus and hopes of an economic re-opening based upon recent progress on COVID testing and vaccines.

2 In the third Quarter 2020, stocks on the DSIP List also underperformed their benchmark, and for many of the same reasons mentioned above. Year-to-date, roughly two-thirds of the companies on the DSIP List have announced dividend increases with an average increase of roughly 8%, which is generally in line with our longer-term expectations for list dividend growth. We are pleased with this increase as companies in general are leaning towards more conservative cash returns to shareholders due to pandemic-induced fears of an economic downturn that lasts longer than expected. Source: Wells Fargo Advisors , FactSet. Data as of 9/30/2020. Past performance is no guarantee of future results. An index is unmanaged and not available for direct investment. Total ReturnDiversified Stock Income PlanS&P 500 IndexPlease see pages 9-10 of this report for Important Disclosures, Disclaimers and Analyst Certification Diversified Stock Income Plan Quarterly Review October 16, 2020 Page 2 of 10 Quarterly and year-to-date commentary After the S&P 500 turned in one of its worst first Quarter performances in history due to global pandemic fears, quarterly performance has been impressive since then.

3 Total return for the S&P 500 was up nearly 21% in the Second Quarter and up another 9% in the third. Growth stocks outperformed value once again during the most recent Quarter and risk-on assets outperformed risk-off as monetary stimulus and news of potentially getting closer to a vaccine offset some spikes upward in COVID cases towards the end of the Quarter . Massive stimulus packages from the Federal Reserve and Congress helped overall market performance and served as a backstop to the markets. Consumers also came out of hiding a bit in the summer months and this positively impacted some service-oriented and manufacturing businesses. Stay at home and home related stocks have unsurprisingly performed quite well due to the pandemic and low interest rates. The best performing sectors for the third Quarter were industrials, materials and consumer discretionary.

4 Conversely, energy stocks were the worst performing along with financials. Our overweight position in the many risk-off sectors hurt DSIP relative performance in the Quarter along with our underweight in technology as many tech names do not pay dividends. Our underweight position in banks and energy helped list performance. Looking ahead to what the remainder of 2020 might bring for our DSIP List of companies is difficult to say with any certainty given the global pandemic and varied election outcomes. Market volatility will likely remain high for these very reasons. It is somewhat surprising to us to see stock market performance so decoupled from the real economy and wonder what that means going forward. We would expect many of the names on our list to continue to see a negative impact to sales and earnings related to the coronavirus.

5 Service and consumer oriented sectors will be hit especially hard as many of these businesses have been operating at reduced capacity in some fashion. Despite these many concerns, our overriding equity theme in 2020 is Stay the Course . This investment message implies being disciplined and sticking with core investing principles such as proper diversification, focusing on high quality companies, and seeking out reliable and rising income stories especially given the low level of interest rates. The average dividend yield of the DSIP List is currently above both the 10-year Treasury yield and the average yield for the S&P 500. In these volatile markets, let s not forget the fundamental basics of the DSIP List. The DSIP List focuses on proven companies that provide consistent annual dividend growth over a long-term investment horizon.

6 The DSIP List objective is to provide a diversified list of industry-leading companies with solid financials whose consistent dividend growth can help offset the wealth eroding effects of inflation. The DSIP List tends to favor more defensive sectors/stocks due to its number one criteria to make the list, consistent annual dividend growth supported by rising earnings and free cash flow generation. Dividends S&P 500 large-cap companies struggling to get through this challenging period unsurprisingly reduced the amount of money returned to shareholders via dividends in the first nine months of 2020. Slowing sales led to reduced cash flow and consequently slowing dividend growth. We believe dividend negativity could continue into year-end with more emphasis on dividend suspensions rather than outright cuts. But how about the companies increasing their dividends?

7 Specifically during the third Quarter , 18 DSIP List companies declared dividend increases with an average increase of 7%, bringing the full year average to 8%. The full year average excludes stocks that were taken off our list in 2020 due to suspended dividend payments, but if we were to include those three suspensions as -100% entries, the average would drop to about +2%. Companies adding to impressive track records of dividend growth during the Quarter include: Lowe s Companies, Inc. increased for its 58th consecutive year; Illinois Tool Works, Inc. 55th; Federal Realty Investment Trust 53rd; Grainger, Inc. 49th; PPG Industries, Inc. 48th. While a company s consecutive dividend increase history is not a prime consideration for inclusion on the DSIP List, it can highlight an ingrained commitment to shareholders that spans multiple Boards of Directors and management teams.

8 Diversified Stock Income Plan Quarterly Review October 16, 2020 Page 3 of 10 The average annual dividend increase for DSIP since its first full year in 1994 is roughly 10%, ahead of the corresponding number for the S&P 500 of 6% and annual inflation of about 2% as measured by changes in the Consumer Price Index (see the figure below). Although future results should not be assumed to equal historical performance, we believe that holding a diversified portfolio of DSIP stocks has proven to be and should continue to be a viable strategy to help investors generate income and stay ahead of the rising cost of living. Source: Federal Reserve Bank of St. Louis, S&P, Wells Fargo Advisors . Inflation represented by the Consumer Price Index. Data through year end 2019. The Consumer Price Index (CPI) produces monthly data on changes in the prices paid by urban consumers for a representative basket of goods and services.

9 Past performance is not a guarantee of future results. An index is unmanaged and not available for direct investment. Third Quarter list changes We removed Exxon Mobil Corporation (XOM-$ ) on August 18. With its Second Quarter 2020 results, Exxon provided commentary around debt, spending and the company s dividend. Specifically, Exxon plans to hold debt at the current (elevated) level, the company does not plan to issue more (already issued $23 billion in 2020) in the near term. In order to maintain its current dividend, the company reduced spending plans (capital expenditures -30% from original plan, operating expenses -15%) and noted more work being done on this front. At the same time, management was also very vocal that the dividend remains a priority. We believe dividend growth will be subdued at best for the foreseeable future with more risk of a downside surprise than upside.

10 In the event commodity markets improve, we believe Exxon s priorities would rank as 1. Bringing back at least some spending to support increased cash flow, 2. Debt reduction (a big mountain to summit), and 3. The dividend and dividend growth. Our base case assumption at this point is that Exxon s dividend remains at $ per Quarter until late 2021. At that point, a nominal increase (perhaps $ per share) would allow the company to maintain its long track record of year-over-year dividend growth. Diversified Stock Income Plan Quarterly Review October 16, 2020 Page 4 of 10 Appendix A 2020 Diversified Stock Income Plan Dividend Increases in the First Quarter Company Symbol New Annual Dividend Rate Year Earlier Annual Dividend Rate Annualized Increase First Quarter N/A N/A N/A Realty Income Corporation1 O $ $ WEC Energy Group Inc.