Best DRIP Stocks for Your Dividend Portfolio

By: Andrew McShane

Finding the best DRIP stocks can add serious income to your portfolio. Here are 3 top DRIP stocks and how you can find your own.

You are about to learn...

  • Why you should invest in DRIP stocks
  • How to find the best DRIP stocks
  • 3 Top DRIP stocks on the market right now

With a dividend reinvestment plan (“DRIP”), you can buy additional shares of a company stock by using the dividends received to buy shares. But not all businesses are worthy of your DRIP investment dollars and we want to highlight some of the best DRIP stocks for your dividend portfolio that are available in the market right now.

Why DRIP Stocks?

The stocks that we highlight here will serve as the beginning of a great DRIP stocks list.  This DRIP stocks list will allow you to invest wisely and get a reasonable return on your investment dollars. DRIP investing companies are quite popular because they allow you to make small incremental investments in high quality companies from time to time. And if you invest in dividend growth companies, you will be able to buy more shares as the dividend payments increases over time.

Many investors prefer a steady stream of dividend income to supplement their other income sources. Especially as you get close to retirement age dividend paying stocks are attractive. This is because they provide a long-term income stream now while you wait for the company’s stock price to appreciate. The dividend yield from the cash payments that you reinvest plus the share price appreciation should lead to a total return that will beat the S&P 500 index. But you need to invest in the right businesses.

Some DRIP investing companies pay an annual divided, and some pay monthly, but the most common dividend payment frequency from a dividend stock investment is quarterly. Quarterly dividend payments mean that investor will receive a dividend payment ever three months. With DRIP investing companies, that gives you four opportunities a year to take those dividend payments received and reinvest the dividends in additional shares.

How to Find the Best Drip Stocks

There are two ways to set up a DRIP program. One is to buy stocks directly from the company through a company sponsored dividend reinvestment plan. This is historically how most dividend reinvestment plans operated. And in some cases, these company sponsored plans allowed the participant to reinvest their dividends at a slight discount to the market price.

More recently most brokerage houses have dividend reinvestment plans that allows you to buy more shares of most dividend paying stocks by reinvesting the dividends received. Using the brokerage houses to administer the reinvestment of your dividends makes this much simpler for an investor.

Here are the characteristics to look for in a good business for your dividend reinvestment plan:

  1. The business should be a high-quality company whose products you use every day. If you don’t understand the business, stay away.
  2. The business should have a history of paying a dividend for at least the last ten years, and preferably have a history of increasing those dividends annually. Start by looking at published lists of dividend aristocrats (businesses with dividends paid for at least 25 consecutive years) and dividend kings (businesses with dividends paid for at least 50 consecutive years).
  3. The business should have a dividend payout ratio of 60% or less. The dividend payout ratio is calculated by dividing the annual dividend paid per share by the earnings per share. If the payout ratio gets too much above 60% it may indicate that the business is paying too high a dividend for the amount of earnings being generated. This is a yellow flag that the dividend could be reduced or stopped in the future.

3 of the Top Drip Stocks on the Market

Let’s look at three examples of high-quality companies that are prime example of companies to invest in with a dividend investment plan:

Essential Utilities (ticker WTRG, formerly Aqua America)

Essential Utilities is primarily a regulated water utility serving more than three million people in nine states.

There are few things more boring than a water utility. But Essential Utilities has increased its earnings and dividends in the six to eight percent range each year.  This has been done through higher rates charged to customers plus occasional acquisitions of other water utility businesses.

Essential Utilities has paid a dividend for each of the last 27 years. And with a payout ratio of approximately 60%, your future dividend payments are likely to be safe.

One of the best attributes of the Essential Services dividend is that you can set up a dividend reinvestment plan directly with the company. Once set up, you can reinvest your dividend received into more stock at a 5% discount to the market price. This is of course a wonderful incentive for shareholders because they are getting a discount on the price paid for additional shares of Essential Service stock. You do not see this kind of discount very often.

Put it all together and you have a high-quality company who can afford to increase its dividend each year. And as an added bonus, if you sign up directly with the company’s dividend reinvestment plan you can reinvest your dividends at a 5% discount to the market price of the company’s stock.

Chubb Insurance (ticker CB)

Chubb provides various insurance and reinsurance coverage to commercial customers. Although this is a competitive industry, Chubb has a solid reputation that has translated into a profitable and growing company with rock solid financial results

With more than $35 billion in revenue and more that $11 per share in net income it can easily afford to pay its quarterly dividend that amounts to approximately $3.20 a share. This equates to a very low payout of 29%, which indicates there is room for future dividend increases.

And Chubb certainly has a history of dividend increases. Chubb’s most recent dividend increase marked the 27th consecutive year that the company increased its dividend to shareholders. This is a fantastic accomplishment.

Johnson and Johnson (ticker JNJ)

Johnson and Johnson is a global leader in the development and sale of pharmaceuticals, medical devices and consumer products.

Johnson and Johnson is the perfect example of investing in a business whose products you use every day. Products like Tylenol, Motrin and BENGAY are just a few examples of the kinds of products sold by Johnson and Johnson that we all use every day.

With a market capitalization approaching $400 billion and a fortress like balance sheet, they are a successful company with the financial resources to continue to grow via whatever strategy they choose to pursue.

They pay a dividend of $4 a share each year, so with earnings of approximately $8 per share, they have  a very safe payout ratio of 50%.

As one of the few dividend kings out there, Johnson and Johnson has increased its dividend 58 consecutive years.

In Summary:

Reinvesting the dividends you receive into more shares of stock is a great way to build wealth.

Look for stocks of high-quality businesses whose products people use every day.

Make sure the dividend payout ratio is less than 60% for any company you invest in.

Inquire if the business has a company sponsored dividend reinvestment plan. Or you can take advantage of the services of most brokers to reinvest your dividends for you.

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