Dividend reinvestment program (DRIP) plans are very popular amongst long-term investors who desire to increase their stake in a particular security primarily because of price appreciation and compounding. DRIPs allow investors to reinvest their dividends to buy more stock without incurring brokerage fees. Here is an analysis of five stocks that offer an easy subscription to their DRIP plans; these are stocks of companies that are more likely to appreciate in value over time because of the nature of the products and/or services they provide.
The Southern Company (NYSE:SO) is trading very close to its 52-week high of $46.69. As of this writing, it distributes an annual dividend of $1.89, has a yield of 4.30% and a payout ratio of 73%. On a recent announcement on January 25, 2012, the company stated that they are expecting earnings below analysts' estimates for 2012, which sent the stock from around $45.12 to $44.54 today.
Revenue in fiscal year 2011 was $17.5 billion. During the last four years revenue has increased at a small compound annual growth rate of 0.85% while income has increased at a compound annual growth rate of 5.85%. While revenue has remained almost stagnant, management has been able to increase income at a higher rate, a good indication they may continue to improve income in the future.
Earnings per share (NYSE:TTM) are $2.57, compared to $3.18 and $7.55 for CenterPoint Energy, Inc. (NYSE:CNP) and Entergy Corporation (NYSE:ETR), respectively. Nevertheless, the price to earnings ratio is higher for The Southern Company (17.32) compared to CenterPoint Energy (5.86) and Entergy Corporation (8.97). This implies investors' confidence for appreciation in value is higher for The Southern Company, thus they are willing to pay a higher price, or premium, to own the stock. As a result, I believe this stock will appreciate in value in the future; therefore it's a good idea to join the DRIP plan to take advantage of lower trading costs and an opportunity to increase the value of your investments by reinvesting your dividends.
Raytheon Company (NYSE:RTN) is trading a couple of dollars below its 52-week high of $53.12. The stock distributes an annual dividend of $1.72, has a yield of 3.40% and a payout ratio of 40%.
Revenue for fiscal year 2011 was $24.8 billion; revenue for the last four years has increased at a compound annual growth rate of 1.77%, while income has increased at an annual compound growth rate of 2.78%. Earnings per share are $5.28 compared to $5.34 and $7.82 for competitors The Boeing Company (NYSE:BA) and Lockheed Martin Corporation (NYSE:LMT), respectively. Furthermore, the stock's price to earnings ratio is 9.54 compared to 14.15 and 11.32 for Boeing and Lockheed Martin, respectively.
I think revenue will continue to increase at a slow pace but it should not be a major concern. If the stock price declines, it means you can purchase more shares with your reinvested dividends when prices are lower.
Cliffs Natural Resources Inc (NYSE:CLF) issues an annual dividend of $1.12, has a yield of 1.60% with a payout ratio of 5.00%. Revenue for fiscal year 2011 was $4.7 billion. Moreover, revenue for the last four years has increased at a compound annual growth rate of 19.77% while income has increased at a staggering compound annual growth rate of 277%.
In addition, Cliffs Natural Resources has better gross and operating margins than all of its competitors. For example, earnings per share for Cliffs Natural are $12.95 compared to $0.48, $2.76 and $3.52 for Alpha Natural Resources, Inc. (ANR), CONSOL Energy Inc. (NYSE:CNX) and Peabody Energy Corp. (BTU), respectively.
The stock is not very expensive compared to its competitors; it has a price to earnings ratio of 5.40 while Natural Resources, CONSOL Energy, and Peabody Energy have price to earnings ratios of 41.82, 12.99 and 9.84, respectively. I believe the stock will trade back in the $100 range in the future. That is why I believe right now is a good time to purchase this affordable stock. You can grow your wealth via compounding by reinvesting your dividends to purchase more stock of the company.
Public Service Enterprise Group Inc (NYSE:PEG) is not a very volatile stock, as it has traded in the $28 to $35 range for the last twelve months. The stock issues an annual dividend of $1.37, has a yield of 4.50% at a payout ratio of 53%.
Revenue for fiscal year 2011 was $11.8 billion, a compound annual growth rate decrease of 1.79% during the last four years. Income has increased at a compound annual growth rate of 4.04% during the same period. Earnings per share are $2.80, compared to $3.57 and $2.49 for Consolidated Edison Inc. (NYSE:ED) and FirstEnergy Corp. (NYSE:FE), respectively.
Looking at a 5-year graph, the stock is trading within the range given earlier, more or less. Thus, I believe the stock will continue to follow this pattern unless something highly unexpected by the market takes place. However, I think it's a good buy because of the healthy dividend, solid yield, and strong potential for the stock to jump higher.
Praxair, Inc (NYSE:PX) has a market cap of $32.20 billion. It currently distributes an annual dividend of $2.20, has a yield of 2.10% and a payout ratio of 37%. The stock is trading a couple of dollars below its 52-week high of $111.74.
Revenue for fiscal year 2011 was $11.2 billion, a compound annual growth rate increase of 1.04% during the last four years. Net income increased at a compound annual growth rate of 8.40% during the same time period. Earnings per share are $5.45, compared to $5.57 and $1.38 for its competitors Air Products & Chemicals Inc. (NYSE:APD) and L'Air Liquide SA (OTCPK:AIQUY), respectively.
I think an improved economy will help this stock continue its solid bullish trend as well as earn higher revenue, and maybe issue a higher dividend. The stock has been on an uptrend since 2008.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.