The 5 Best Dividend Stocks to DRIP

by: Vatalyst

In view of the stock market's performance in the recent past, investors are seeking to invest in stocks with better dividend yields. I have highlighted five companies below which have an impressive dividend payment history and dividend reinvestment plan.

A dividend reinvestment plan allows plan participants to reinvest dividends on a quarterly basis. The dividends are reinvested in incremental shares, one at a time, or in fractional shares. This enables the investor's money to be continuously and automatically allocated. This also means that more shares can be bought at a lower price, lowering the investment cost basis. Here is my fundamental analysis on several companies that have compelling valuations and robust DRIP programs available to investors:

Kellogg Company (NYSE:K): Kellogg, a well known name for ready-to-eat cereal and convenience food products offers a great dividend package to its investors. With a market cap of $19.49 billion, K has a low beta of 0.48. It has a five year average dividend yield of 2.8%. K’s historical payouts have made this stock as one of the favorites of institutions; at present, 82.5% of the stock is held by institutions. Trading at $53.85 levels, Kellogg’s dividend yield for this year stands at 3.2%, translating into a payout ratio of 48%. As per latest quarterly results, Kellogg posted revenue growth of 10.6%, beating its competitor General Mills’ (NYSE:GIS) revenue growth of 8.9%. Its gross and operating margins stand at 42.44% and 16.06%, respectively, beating industry average margins of 32.43% and 9.41%, respectively. K trades at a price to earnings ratio of 16.13 times, which is lower than the industry average price to earnings ratio of 17.15 times. On the back of strong potential growth and historical payouts, Kellogg is a recommended buy candidate. Shares have an upside of 10.4% from their one year estimated target price of $59.44.

In May 2011, UBS increased its target price for K from $59 to $63 with a buy rating. The analysts at UBS believe that the company's top line will accelerate further on the back of price revisions made by it. Kellogg's DRIP program offers partial dividend reinvestment.

Sanofi-Aventis (NYSE:SNY): Sanofi’s main revenue is derived from businesses in developed markets. However, due to increased generic competition, Sanofi is facing revenue decline. As per company officials, since first quarter 2009, Sanofi lost almost $1.2 billion in quarterly sales of its historical products. To offset the pressure, the company is strengthening its presence in emerging markets. The company enjoys a 5.5% market share in emerging markets. In 2010, 29.9% of the company’s revenue was generated from businesses in emerging markets.

Around the price level of $33.93, SNY's market cap is calculated at $91.08 billion. Its price to earnings ratio of 15.39 times is lower than its competitor GlaxoSmithKline plc’s (NYSE:GSK) price to earnings ratio of 21.32. Moreover, with earnings per share of $2.20, Sanofi’s payout ratio is 79%, translating into a dividend yield of 4%.

In the second quarter, where industry average revenue grew by 14.6%, SNY revenue declined by 5%. The same is the case with GSK, as its revenue declined by 4.3% in the same period. SNY’s operating margin of 21.8% is better than the industry average at 12.8%, but lower than GSK's at 39%.

SNY is focused towards increasing its share in emerging markets. On the back of Sanofi’s high payout ratio and focused management, the stock’s dividend reinvestment plan is recommended. SNY offers a potential upside of 30% from its one year estimated target price of $44.22.

SNY's DRIP program is particularly useful to investors because it offers partial dividend reinvestment and has only a $1 reinvestment fee.

Sherwin-Williams Company (NYSE:SHW):

Sherwin’s strong management is focused towards maximizing shareholder wealth with continued expansion of the company's retail stores. The company's management targets to open 50 to 60 new stores this year. The group has already invested in multiple bolt-on acquisitions, which will help Sherwin-Williams achieve economies of scale and pick up logistics synergies. Trading around the price level of $71 and with earnings per share of $4.56, SHW enjoys a price to earning ratio of 16.7 times. With a payout ratio of 32%, the stock has a dividend yield of 1.9%. Moreover, 70.3% of the stock is owned by institutions. SHW is relatively less volatile than the market, as it has a beta of 0.56. As per the latest quarterly results, Sherwin’s quarterly revenue grew by 9.9%, which is higher than industry average. But it is lower than that of its competitor, PPG Industries (NYSE:PPG), with growth of 3.6% and 15.3%, respectively. SHW has strong gross and operating margins of $43.94% and 9.18%, respectively, which are better than the industry average.

On August 31, analysts at Barclay’s capital initiated coverage on the stock with equal weight and a target price of $81- a potential upside of 6.1% from the price level of $76.30. Separately, Citi has a target price for SHW at $81. Management's focus on strategic investment will help the company post better revenues, profits and payouts growing forward. Therefore, Sherwin’s dividend reinvestment plan is recommended on a valuation basis. SHW also has a competitive DRIP reinvestment commission of $1, with no additional plan fee.

Xerox Corporation (NYSE:XRX):

The "document company" is in a continuous make-over mode. Its recent agreement with HCL Technologies is one example of its progress. As per the agreement, HCL technologies will provide engineering services for printers and imaging products. The company’s priorities are to accelerate revenues along with maintaining its leadership in imaging.

Xerox has increasing revenues and operating margins. It has a strong cash flow that will support dividend growth, share repurchase, and acquisitions. As per company models for available cash, the company plans to utilize 70% to 80% of cash for its share repurchase program followed by 15% to 25% for acquisitions and 1% to 3% for dividend growth. The company believes that its core market will grow by more than 5% next year, with service penetration increasing in Europe. The company will benefit largely from increasing demand. Moreover, Xerox’s products hold a strong reputation in the public sector.

Xerox’s latest quarterly results show its strength and competitive advantage over its peers. Its quarterly revenue grew by 1.9%, whereas Canon’s (NYSE:CAJ) revenue declined drastically by 13.8%. Xerox revenue growth was better than Hewlett-Packard Company's (NYSE:HPQ) as well, where HPQ revenue increased by only 1.5%. Around the price level of $7.18, XRX trades at a discounted price to earnings ratio of 10.24 times, against the industry average price to earnings of 20.75 times. It has a payout ratio of 25%, with dividend yield of 2.3%. Moreover, 84.4% of the stock is owned by institutions. The stock is a recommended DRIP candidate as the company pays dividend reinvestment fees on your behalf. The reinvestment commission, paid by the investor, is $1.

Sotheby's (NYSE:BID):

Sotheby’s, with an expertise in auctions, has a strong global presence with 90 locations in 40 countries. In 2010, Sotheby’s market share stood at 48%, whereas competitors' Christie's International and Phillips, de Pury & Company LLC market shares were recorded at 49% and 3%, respectively. BID is more volatile than the market, as it has a beta of 2.39. Interestingly, 97% of the stock is owned by institutions. Trading at $28.92 price levels, BID's dividend yield hovers around 0.6%. However, BID's historical five year average dividend yield is of 2.2%.

In 2010, total auction sales were recorded at $4.3 billion from which 29% of sales were generated from the auction of furniture and decorative arts and 24% from impressionists and modern art works. Increasing revenues are supported by the increase in the number of Chinese buyers in the market. As per the company, 13% of the sales were generated from sales to Chinese buyers. This figure was only 3% in 2004.

One point of concern is Sotheby’s credit agreement, which has a few negative factors which investors must consider before making an investment. As per one of the covenants of the agreement, BID cannot pay a quarterly dividend of more than $0.10 per share or $4.0 million. It can only be increased if BID meets a certain fixed charge coverage ratio. However, the credit agreement will end on September 1, 2014. Trading at a price to earnings ratio of 9.75 times, BID offers a potential upside of 93% to its one year estimated target price of $55.97. I expect that the company will continue to provide better dividends going forward. The stock is a recommended buy. Moreover, in August, analysts at Craig-Hallum upgraded BID to a buy from hold with the target price of $54. The DRIP program offers partial dividend reinvestment.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.