by James A. Smith
A DRIP can serve as an easy alternative to the frenzy of active trading. Essentially, an investor can set up a DRIP and rest easy with the assurance that his or her account is accumulating the dividend payments of chosen businesses.
Through my research I have uncovered five great DRIP candidates that are worth buying right now. Here is my actionable analysis:
Take a look at Bank of New York Mellon (BK) - a business with a proven track record of distributing payments to its shareholders. BK also allows investors to choose a custom DRIP, and offers a program to set up this account free of excessive fees. An investor is required to purchase one (1) share for eligibility to begin a DRIP account. A BK DRIP account requires a $50 minimum investment, and prohibits any initial investment exceeding $150,000. Further, an investor can decide to remain wholly invested in BK and keep his or her dividend stream committed to buying more shares, or choose to receive partial cash payment from the dividends. BK pays a 2.6% dividend, a yield that is higher than Bank of America Corporation (BAC) or Barclays (PLC). Each of these businesses pays a 0.6% and 2.4% dividend, respectively. The best route for a DRIP is with BK.
Most importantly, BK is continuing to make money, an activity that is seriously important to the success of an investor. In fact, it’s really the only activity a stock market investor should care about – whether or not the business is making money. A moneymaking business is one that is earning for its shareholders. So it is important to identify companies that can make money and increase earnings over a multiyear period.
A DRIP investor may also consider Alcoa (AA), an aluminum company that currently trades well below its historic valuation. This is a business that has paid a dividend to shareholders since 1962. AA trades at 11 times earnings and is well positioned to grow significantly in the advent of a construction and housing rebound. It pays a higher dividend, and has a higher operating margin than its chief global competitor, Aluminum Company of China (ACH). AA pays a 1.2% dividend yield, and has a payout ratio of 13%. Coincidentally, BK is the registered administrator of the AA DRIP, and the plan is only offered to shareholders of AA. To become a shareholder of AA, an investor must purchase at least one (1) share of the business. This plan requires a minimum investment of $25 and prohibits an initial investment of more than $5,000. The AA DRIP does not charge for investment fees or optional cash fees. Alcoa's DRIP information page is a particularly helpful resource.
Conoco Philips (COP) would also be a good candidate for any investor’s DRIP portfolio. It offers an advantageous DRIP to potential investors. An investor needs to make an initial purchase of at least $250 to start an account. In many ways, COP is a very shareholder-friendly company. Currently, it has a 32% dividend payout ratio. COP does not charge the shareholder account setup fees, automatic or reinvestment fees, or optional cash purchases. A COP DRIP account holder must invest at least $25, and cannot invest more than $10,000 in that account. COP has paid a dividend for decades and it makes a habit of increasing this distribution. A company of the same breed that offers a favorable DRIP is Exxon Mobil Corporation (XOM).
Duke Energy Corporation (DUK) is also a huge dividend distributor. With a 4.8% dividend, DUK represents an energy business that offers one of the highest yields in the industry. To enroll in the reinvestment program of DUK, one must invest at least $250. The maximum investment per year in this DRIP is $100,000. The current dividend payout ratio of DUK is 71%.
DUK offers a better investment opportunity than those of its competitors. The Constellation Energy Group (CEG) pays a 2.4% dividend, exactly half the yield of DUK. Plus its revenue growth is down 11% year over year. Similarly, Progress Energy (PGN) pays a 4.6% dividend, but at 20 times earnings, it trades at a much higher multiple than that of DUK. Even more alarming, earnings for PGN are down year over year more than 19%. If you want a dividend-paying energy business, go with DUK. Read more about a DRIP from DUK here to enroll in its plan.
The Kellogg Corporation (K) should be considered for a DRIP account. This is a business that is highly competitive in its industry. It manages a 50% return on equity, and a 16% operating margin. Its earnings are growing at a 13% year over year – this is all good news for shareholders. Into the next few years, K will be capable of sustaining (and raising!) its dividend distribution to shareholders.
K pays a 3.5% dividend, and its dividend payout ratio is 50%. It offers a low fee DRIP that involves minimal – and therefore favorable – fees. An investor can initiate an account for as little as $25 and invest up to $100,000 per year in this plan. K pays a higher than a close competitor, General Mills, Inc. (GIS), a business that pays a 3.1% dividend. However, GIS has reported negative earnings growth – which is bad news for shareholders. If the business isn’t making money, neither will its shareholders. Clearly, K is the way to go. Read more about the DRIP for Kellogg here.
Remember, although a company may pay a strong dividend currently, if that business does not have consistent and future earnings power, the shareholders won’t get paid over the long run. DRIPs are a great utility for the hands off investor that can eventually build a sizeable ownership interest for the account holder. Start a DRIP after considering a business’s ability to increase earnings and dividend payments year after year.