A dividend reinvestment plan, or DRIP, is the ultimate tool for long term, dollar cost averaging investing. DRIP plans are commonplace, so picking some of the best ones is a bit of a challenge. The biggest risk to a DRIP investor is a drop in dividends. So my number one priority is overall financial health. Second, a DRIP works best when dividends are raised consistently. So, I look for companies with long term dividend growth consistency and with room or likelihood for further advances. Finally I want companies whose stocks are likely to show some growth in upcoming years. As a technical matter, I have disqualified companies that charge what I believe to be spurious fees in administrating their DRIPs.
Dow Industrial component Procter & Gamble (PG) is the quintessential large, safe, stable dividend stock that also offers a DRIP, so it is a logical starting point to this article. P&G has raised dividends for 54 years in a row, and its dividend rate now stands at an annual $2.10 per share, a 9% increase from its 2011 level. The current yield is 3.1%.
P&G has done an admirable job of maintaining earnings during a period of lackluster, at best, worldwide economic conditions. 2011 was not just difficult for P&G because of the economy, currency fluctuations turned against P&G late in 2011 as well. Core earnings in its most recent quarter of $1.10 per share, were down nearly 3% from the year earlier quarter's $1.13. Management sees fiscal 2012 earnings at $4.00 to $4.10 per share, which would be up a few percent only from fiscal 2011 earnings of $3.95 per share. P&G's profits in all areas are being driven by stronger "organic" sales across all its business units, and sees the limited profit of 2012 being solely due to a significantly higher tax rate.
P&G's DRIP is excellent. One can buy stock directly from the company, for as little as $250. There are no commissions or fees, and after that first investment, in addition to quarterly dividends, investors can make additional purchases of as little as $50 that can be made commission free. Sales can be made for as little as $5, plus 12 cents a share, all without extra brokerage or any maintenance fees.
P&G is as close to a "buy it and forget it stock" that exists, and particularly well suited for long term, conservative investors.
Paychex (PAYX) is among the largest business outsourcing companies in the world. Its focus is on small and midsized businesses, leaving the large business segment to its larger competitor, Automatic Data Processing, Inc. (ADP).
Paychex' profits have been running in the same rather narrow range since 2009, with per share earnings of $1.48, $1.32 and $1.42 in 2009, 2010 and 2011, respectively. If the U.S economy continues emerging from the recession, Paychex' business will get back on the fast track, pulling earnings and dividends along with it. Dividends at Paychex had risen many years until 2009, and since then had been flat until a recent raise up to $0.32 quarterly, for a current yield of 4.1%. The current dividend is 87% of earnings, so the importance of growing Paychex' earnings to support the dividend is apparent.
Paychex' DRIP is similar to P&G's, except that optional subsequent purchases must be for at least $100. The only fees for the Plan is upon selling stock, when a $10 charge, plus a 10 cent per share fee, is charged. The Paychex plan is administered not by the company, but by its agent, American Stock Transfer and Trust Company.
Paychex gets my endorsement if you believe, as I do, that the U.S. employment numbers will gain steam going forward.
Genuine Parts (GPC) is a leader in industrial replacement, and particularly, automobile replacement parts. It is a true dividend champion, having raised its dividend 56 years in a row after in February 2012 raising its quarterly dividend by 10% to 49.5 cents per share, for an annual yield of 3.2%.
Genuine Parts business is very well suited to the times. The average U.S. automobile is 11 years old, and needs increasing amounts of replacement parts. In addition, Genuine Parts only distributes its products in the United States, Canada and Mexico, with the U.S market dominating. Genuine Parts has little exposure to security or currency problems.
In 2011, Genuine Parts reported earnings of $565 million, or $3.58 per share, a 19% gain from 2010's $3.00 per share. This earnings jump was driven by a $1.3 billion increase in revenue, by 11% up to $12.3 billion. Its dividend is obviously well supported and further annual increases are all but assured.
Genuine Parts' DRIP is simple and generous. The one downside is one cannot make the initial stock purchase directly through the company. The plan only can be used by existing shareholders. Other than that caveat, the plan is flawless. Minimum ongoing purchase amounts can be as low as $10, and the sales fee is a flat 8 cents per share. There are no other broker or maintenance fees.
Genuine Parts is one of my favorite high capitalization ($9.8 billion) stocks, and is perfectly suited as a DRIP candidate with its growing earnings, low plan costs, and near certain growing dividends.
American States Water (AWR) distributes regulated water and electrical service in California, and is the small capitalization ($700 million) representative of this list. Like other water utilities in this country, it has a great record in its dividend program, having raised it 57 consecutive years. The current quarterly dividend is $0.28 per share, for a yield of 3.1%.
American States will not release 2011 earnings until March 12. Indications are that in its traditionally weak fourth quarter, it earned about $0.40 per share. That would create 2011 earnings of $2.24 per share, allowing easy coverage of the dividend.
Water utilities uniformly suffer from high capital costs due to their needs to invest heavily to update infrastructures. American States' ace in the hole is its U.S. military contracts to do consulting, construction and maintenance work on military bases.
American States' DRIP has one barrier, which is its $10 set up fee. One can buy stock directly from the company for as little as $500, and after that optional purchases are allowed for as little as $100. There are no other fees ever, expect a flat $15 fee for sales of stock.
If you are interested in a water utility, American States is a fine choice, and its DRIP is well suited for long term holding.