We've recently seen some very upsetting trends in European and Asian macroeconomic data, but US data points to a healthy continuation of our recovery. Company earnings have been stable, and even the financial sector has shown some signs of life (particularly in earnings figures).
For the risk-inclined, there are some extreme bargains that can be found in the European exchanges. There are also opportunities to catch the falling knives in Asia if that's what you enjoy doing, but this article is going to focus on US companies that offer compelling opportunities for a DRIP (Dividend Reinvestment Plan).
1. ConocoPhillips (COP)
ConocoPhillips is a great dividend growth stock, which means it's going to be a really great DRIP stock in the long run. Dividends have been increased consistently for the last 10 years (without a single hiccup despite all the turmoil we've seen in oil prices), and revenue has been steady.
ConocoPhillips has particularly strong US upstream operations, which accounts for over half of their total crude oil and NGL output. This is especially important for the company's growth after ConocoPhillips' sale of Phillips 66 (PSX) which occurred at the start of last month. Note that this event was the catalyst for the 30% drop in COP shares - shareholders received shares of PSX to compensate for the loss in value of ConocoPhillips.
This exit from the refiner and retail-oriented business is a potentially rewarding move if fuel prices are kept tame while crude recovers in price. I also like that natural gas producers have been cutting production recently, which should drastically improve the margins on gas exploration & production.
If COP shares retained a 5% yield, a DRIP would yield 63% in 10 years on the reinvested dividends alone.
2. Johnson & Johnson (JNJ)
JNJ is an ideal DRIP candidate for a variety of reasons, and I am choosing it as a DRIP candidate over another one of my favorites, Pfizer (PFE), mostly due to large differences in the companies' predictability. Pfizer's dividends have been cut more than once in the past, while J&J has had consecutive increases for almost 50 years. If we're constructing a DRIP portfolio, we are counting heavily on the dividends!
In addition, JNJ derives only about 37% of its sales revenue from its pharmaceuticals division (according to Q1 2012 data). Pfizer, on the other hand, is a pharmaceutical company and derives about 85% of its revenue from pharmaceuticals (also calculated with Q1 2012 data). Drug development is extremely expensive and risky - we are trying to avoid high risk / high reward investing in this portfolio.
If JNJ held a 4% yield, a DRIP would offer 48% returns in 10 years.
3. Altria Group (MO)
Altria is a sin stock that is in the midst of a very lengthy rally, spanning about 3 years with a 100% return. Despite the never ending battle between the government and the great tobacco companies, Altria has done more than survive in the new world - they've offered us an extremely lucrative dividend stock with fat profit margins.
The main concern at this point is the company's rather pricey stock relative to the company's fundamentals. Altria is now valued at about $67 billion, with a PEG ratio of about 2.5 based on average expectations. This number alone will undoubtedly send certain value investors running for the door, but there are a few justifications for the high price.
One is the freakishly high dividend payout ratio. The company had a 96% payout ratio for year 2011, and hasn't stumbled with any decreases since 2007/2008 when the tobacco industry was slammed by new policies across the US. Almost all of the future improvement that can be scraped out from Altria's earnings is expected to go towards the dividends.
In addition, we are beginning to see tobacco companies winning a few battles against taxation. A high-profile tax proposition in California was recently voted down, and many are expecting better results in other states despite the government's hunger for tax revenue. Nonetheless, Altria's industry remains at risk.
Just like ConocoPhillips, a DRIP would yield 63% in 10 years by itself based on the current 5% yield.