Investors in dividend reinvestment programs (DRIPs) typically have a long-term investment horizon and invest money periodically, most commonly on a monthly basis. The key advantage to DRIPs is that investments benefit from dollar cost averaging.
Many companies run their own DRIP programs, allowing investors to buy directly without a requirement to own full, rather than partial shares. The administration of these programs can be costly, however, so it is common for DRIPs to be run by third-party transfer agents, whose costs are lower because they often provide the same resources for several customers. Additionally, some brokers will allow shareholders to reinvest dividends at no cost. However, these plans apply to dividends only, and do not permit optional cash purchases as most company sponsored DRIPs do. For sophisticated investors who are still working on self-discipline, DRIPs are a great way to invest and continue to do so on a regular basis. Investors can avoid brokerage commissions and take advantage of dividend reinvestment.
Here is my analysis of some of the best stocks to DRIP now.
Caterpillar (CAT) remains the world’s leading manufacturer of mining and construction equipment. Caterpillar operates through three business lines: Machinery, Engines and Financial Products. The Engines business provides diesel, heavy fuel, and natural gas engines for Caterpillar machinery, which includes tractors, underground mining equipment and boring equipment, articulated trucks, and off-road trucks. Its Financial Products division provides financial packages for Caterpillar machinery and engine customers. It has increased dividends each year since 2006, and its dividend of $1.84 is covered 3.4 times by an EPS of $6.54. Revenue is expected to increase by 20% in fiscal 2012, having seen 41% revenue growth last year, with EPS increasing from last year’s level to $9.03. If dividends rise in line with this EPS growth, and coverage is maintained at 3 times, then Caterpillar holders could see dividends rising to over $3 per share. Shareholders need only one share to qualify for the company's DRIP plan, and there are no fees for dividend reinvestment. Fees for extra investments are $2.50 + 3 cents per share. The minimum and maximum investment are $25 and $10,000 per month.
E.I. DuPont de Nemours (DD) makes high performance materials, electronics, biotechnology, and safety and security products. Half of its sales come from overseas, and its 3% dividend yield is covered 2.15 times by its current EPS of $3.68. Estimates for net income would see its EPS rising to $4.26 over the next year on the back of 23% quarterly revenue growth, and analysts expect the share price to react positively as the company rebounds well from the economic downturn. Its DRIP program requires only one share to qualify, and fees for dividend reinvestment are capped at $3 as investing fees. The minimum and maximum investment are $20 and $5,000 per month, respectively.
Travelers Companies (TRV) provides commercial and personal property and casualty insurance products and services to individuals, businesses, and government units primarily in the U.S. Its current dividend of $1.64 is covered two times by its EPS of $3.91. Though its EPS are expected to slide this year to $3.32 to $3.5, it is expected to recover the following year to $5.79 as problems overhanging from the financial crisis are worked through. Travelers has plenty of room to maintain, or even increase its dividend. Its program only requires one share to qualify, and fees for dividend reinvestment and further investing are limited to $3 plus 5 cents per share. The minimum and maximum investment are $25 to $50,000 per year.
General Electric (GE) is now a genuine conglomerate, manufacturing a range of products, from aircraft to railway engines, and providing services from water processing to business financing. Following the hit to its dividend in 2009 due to a struggling GE Capital, GE now evaluates its dividend rate quarterly, and its current dividend yield is 3.60% or 0.68 per share, per annum. With its EPS expected to rise from last year’s $1.37 to $1.56 this year and then $1.66 the year after, it looks likely that the company will continue with its generous dividend policy. The next earnings call is January 20, and I expect some discussion of the dividend. There is no fee for dividend reinvestments, though the company does charge a $3 fee for cash investments in its program. There is a $10 minimum investment and a maximum of $10,000 per week is permitted.
Wells Fargo & Company (WFC) is the fifth-largest bank holding company in the United States, Warren Buffett's cornerstone financial holding, with a total of 11,000 offices in 50 states, Central America, and the Caribbean. Though its dividends were reduced in 2009 as a result of the financial crisis, the company has paid a dividend since 1939. Its 2011 dividend of $0.48 is covered over five times by its EPS per share of $2.70, and equates to a yield of 1.7%. With analysts estimating EPS to increase over the next year to $3.21, a consistent dividend policy will see the dividend rise accordingly. Investments into the program are charged at $3 plus 3 cents per share, and an investor only needs one share to qualify. Dividend reinvestments are subject to a 4% fee. The program requires a minimum investment of $25 and allows a maximum of $10,000 per month.
Coca Cola (KO) was founded in 1886 and is one of the top brand names in the world today. Going forward, I think Coca Cola's emerging market growth prospects are bright, particularly in India and Brazil. The company owns or licenses over 500 branded products across more than 200 countries. Its dividend last year of $1.88 was covered 2.8 times, and puts the shares, around $69 at the time of writing, at a dividend yield of 2.70%. On a forward basis, earnings expectations are at $4.14 per share, ending December 2012. With such a solid brand name and a good track record of increasing dividends, the company is a good DRIP target for investors. Its scheme requires only one share to qualify, and allows investments from $50 to a maximum of $250,000 annually. Fees for dividend reinvestment are 5%, though capped at $2 + 3 cents per share. Fees for other investments are $3 + 3 cents per share.
Boeing Company (BA) is one of the world’s leading commercial aircraft manufacturers, and a major producer of American and foreign military aircraft. Historically, dividends averaged about 30% of annual earnings, and its dividend last year of $1.76 was covered three times by its EPS of $5.05. The current dividend yield is 2.4%. With EPS set to moderate to $4.95, the company has plenty of room to maintain its dividend or increase it over time. Although the minimum investment is $50, its investing fees are just $1 plus commission. An investor needs to hold only one share to qualify for its reinvestment program. The maximum investment amount is $100,000 per year.