September 21, 2012
Written By Chloe Lutts Jensen
For today’s Dividend Edition of Investment of the Week, I wanted to introduce investing with dividend reinvestment plans, or DRIPs. We have two Dick Davis Digest contributors who focus exclusively on investing with DRIPs, and others who recommend them occasionally. So DRIPs appear in the Digests fairly regularly, and I could explain their benefits pretty well. But then I thought, why not let one of our Digest contributors who focuses exclusively on DRIPs—the experts—tell you about them directly?
Cutting out the middleman is what DRIPs are about, after all. So today, for the first time, I’m pleased to present a guest column written by Vita Nelson, the in-house DRIP expert at the top-ranked newsletter Utility Forecaster (currently #1 for ten-year performance according to The Hulbert Financial Digest) and the publisher of directinvesting.com, a comprehensive source for information on DRIPs. I asked Vita, in essence, what’s so great about DRIPs? Here’s what she said.
Children can grow very rich—very easily—because they have time on their side. It’s as easy as one, two three:
1. Buy one Share of a DRIP Stock = $54.05. (We based this example on one share of Hormel Foods and included the service fee for DRIP enrollment, see the parenthetical note below for more details.)
2. Invest $25 per month for 65 years = $19,554.05.
(Total amount invested over the period of 65 years)
3. Total Value at Retirement = $1,974,393.97.
(Assumes average annual return of 10% including dividends)
(Note: This illustration is simply to capture your attention by demonstrating the effect of compounding over the long term. We are not suggesting that any one stock will produce an average annual return of 10%. Rather, we suggest that you invest in a basket of companies in diverse industries. Your Total Value at Retirement will depend on the number of companies you are funding and the amount you are investing in each. In our illustration we invest just $25 per month. You would achieve proportionately higher returns based on committing more funds — rotating investments among stocks in a diversified portfolio.)
So how does $54 become almost $2 million?
Time is an investor’s greatest ally. It is the key element in the power of compounding, and combined with investments in the stock market (where the average annual return has been nearly 11% since 1926), the results can seem like magic.
Compounding at a good rate of return over a long period of time makes it really easy to create millions. Here is another example of the power of compounding: A child who invests $50 a month from age eight to age 13 (a total investment of only $3,600 over the six year period) will end up with more money at age 65 ($1,302,154) than someone who starts investing at age 26 and invests $2,000 EVERY YEAR until he or she reaches retirement age. Those results are based on an 11% annual return.
The challenge is to put together a basket of stocks that will perform as well as, or better than, the stock market as a whole and to do so on a budget.
That’s not an easy task if you are making your investments through a traditional broker, where you typically buy in 100-share (“round”) lots. A representative basket of stocks would likely cost more than most new parents or grandparents would be able to put away for any one child at any one time. What’s more, in a brokerage account it’s all too easy to buy and sell. After all, they make their money from commissions!
Investing through DRIPs is the answer. Companies that offer direct investing tend to be high quality, large caps that pay dividends. As a group, they produce the products and services that make America great.
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A Better Way to Invest
You don’t need a lot of money to set up a diversified portfolio of DRIP stocks. You can start with one share of each company and make small investments to buy additional shares every month (or every quarter). By accumulating shares in this manner, you don’t need to speculate about the right time to invest. That’s because your small regular investments will end up buying fewer shares when prices are high and more shares when they are low. Your net cost will be less than the average cost of the shares during the period. Investing in this manner is called dollar-cost averaging, a strategy that “forces” you to buy low.
Why doesn’t everyone do this?
Most people associate investing with a brokerage account (and buying round lots). If you were to make small, regular investments in a diversified portfolio of companies through a broker, commissions might account for more of the investment than would the stock itself.
Which companies should you select?
Here is a 20-stock DRIP portfolio made up of stocks we like for long-term accumulation. I’ve marked with an asterisk those that are particularly appropriate for the prospective millionaire. Those DRIPs accept small amounts, such as $25 or even $10 — and do not charge service fees for investing or reinvesting — or only tiny ones. The other 10 stocks are also among our favorites for long-term accumulation, but may charge fees for investing or require larger investments amounts.
*Allows very small investments and does not charge fees.
About the Companies in this Portfolio
Additional information is available at www.directinvesting.com)
3M Company (MMM) is a diversified company with strong positions in the consumer, office, graphics, electronics, telecom, health-care, security and transport spaces. Foreign sales account for two-thirds of total revenues. Consensus estimates call for the company to earn about $6.40 per share this year and $6.93 in 2013, up from $5.96 in 2011. The company has total debt of $5.2 billion, cash of $3.7 billion, and operating cash flow of $5.4 billion. The dividend has been increased for 54 straight years and provides a 2.5% yield.
AFLAC Inc. (AFL) is the world’s largest underwriter of supplemental medical insurance, doing business in the United States and Japan. The company earned $5.13 per share in 2010, but after the Japanese tsunami in 2011, its earnings dropped to $4.18 per share ($6.27, excluding write-offs). Analysts are expecting it to earn about $6.52 per share this year and $6.88 in 2013. The dividend has been increased annually since 1983, and the current rate of $1.32 per share provides a yield of 2.7%. Return on equity has averaged over 17% for the past decade.
Caterpillar Inc. (CAT) is the world’s largest maker of earth moving machinery. Its products include tractors, bulldozers, scrapers, lift trucks, graders, loaders, compactors, pipe laying machinery, and off-highway trucks. The company also manufactures diesel and turbine engines for its products. Foreign sales account for two-thirds of annual revenues. CAT is expected to earn about $9.62 per share this year and $10.52 in 2013, compared with $7.40 last year. The dividend has been increased 18 years in a row.
CSX Corp. (CSX) is a transportation holding company that operates about 21,000 miles of railroad track in 23 states and Canada. Dividend payouts date back to 1922, with increases coming annually for the past eight years. The current annual payout of 56¢ per share provides a yield of 2.5%. Rail companies are benefiting from increased traffic as manufacturers, wholesalers and retailers find it cheaper to ship by rail than by truck. The company earned $1.67 per share in 2011 and is expected to earn about $1.84 per share this year and $2.06 in 2013.
Deere & Company (DE) is the largest manufacturer of farm equipment in the world and also makes a wide array of industrial equipment for the construction and forestry industries. For the consumer market, it manufactures lawn and garden tractors and other outdoor power equipment. Dividends date back to 1937 and have been increased for nine straight years, currently totaling $1.84 per share annually, for a 2.4% yield. The stock has a price/earnings ratio of 10.4 and a 5-year earnings growth rate of 9.5%. Consensus estimates call for Deere to earn about $7.78 per share this year and $8.33 in 2013, compared with $6.63 in 2011.
Dr Pepper Snapple Group (DPS) is one of the largest manufacturers and distributors of non-alcoholic beverages in North America and offers a variety of flavored non-cola carbonated soft drinks and non-carbonated beverages. Its products include ready-to-drink teas, juices, juice drinks, and mixers and its brand names include Dr Pepper, Sunkist soda, 7-UP, A&W Root Beer, Canada Dry, Crush, Squirt, Schweppes, Snapple, Mott’s, Hawaiian Punch and Clamato. The 15¢ per share quarterly dividend initiated in December 2009 has since been raised three times, to the current 34¢. The company is expected to earn about $2.96 per share this year and $3.22 in 2013, compared with $2.79 in 2011.
Duke Energy (DUK) is an energy company whose regulated utility operations serve four million customers located in five states in the Southeast and Midwest. Its Commercial Power and International Energy business segments own and operate diverse power generation assets in North America and Latin America. Duke recently acquired Progress Energy, enhancing its position in the Carolinas and Florida. The company is expected to earn about $4.28 per share this year and $4.43 in 2013, compared with $4.38 last year. The dividend has been increased for eight consecutive years and provides a yield of 4.7%.
Emerson Electric (EMR) manufactures a broad range of electrical products and equipment. It spent about 2.3% of 2011′s $24.2 billion in sales on research and development, whereas net profit margins have been averaging around 8.5% since 2000. Dividends have been raised for 55 consecutive years and the company currently pays an annual $1.60 per share, for a 3.2% yield. Analysts expect Emerson to earn about $3.37 per share this year and $3.74 in 2013, compared with $3.24 in 2011.
ExxonMobil (XOM) is the world’s largest integrated oil company and has paid dividends since 1882, increasing the rate every year since 1982. It’s also one of the largest corporations in the world when measured by annual sales, which hit $433.5 billion in 2011. Dividends should continue to grow by about 8% per year. Value Line rates the balance sheet #1 for safety, with cash of over $19 billion, compared with $15.7 billion in debt. XOM should earn about $7.73 per share this year and $8.09 in 2013, compared with $8.42 in 2011, but earnings per share should grow to $10 in three-to-five years.
General Mills (GIS) is a global manufacturer of consumer foods sold through retail stores and is also a supplier of branded and unbranded food products to the foodservice and commercial baking industries. The business is organized into three operating segments: U.S. Retail, International and Bakeries & Foodservice. Its products include ready-to-eat cereals, refrigerated yogurt, ready-to-serve soup, dry dinners, shelf stable and frozen vegetables, refrigerated and frozen dough, dessert and baking mixes, frozen pizza, and a variety of organic products. Consensus estimates call for the company to earn about $2.66 per share in fiscal 2013 (ends May) and $2.89 in fiscal 2014, up from $2.56 last year. The dividend has been increased for nine straight years and provides a 3.4% yield.
Hormel Foods (HRL) operates 29 food-processing plants and its brand names include Hormel, Spam, Dinty Moore, Top Shelf, Little Sizzler, Chi-Chi Salsa, Kid’s Kitchen and Mary Kitchen. Dividends have been increased in each of the past 46 years. The Hormel Foundation owns 48.3% and officers and directors own 3.4% of the 264 million outstanding shares. A strong balance sheet and conservative business practices make Hormel not only a defensive hedge but a high-quality growth stock. Total debt is just $250 million, compared with $625 million in cash. Earnings should total about $1.86 per share in fiscal 2012 (ends in October) and $1.94 in fiscal 2013, compared with $1.74 last year.
Illinois Tool Works (ITW) is a diversified manufacturer that operates a portfolio of more than 850 industrial and consumer businesses throughout the world. In 2003, there were 617 million shares outstanding; today there are 483 million. In August, the quarterly dividend was increased to 38¢ per share, from 36¢, for the 49th consecutive annual increase. (Dividends have been paid every year since 1933 and now provide a 2.5% yield.) Earnings in 2011 were $3.74 per share and are expected to reach $4.12 this year and $4.53 in 2013.
Johnson & Johnson (JNJ) is one of the world’s largest manufacturers of healthcare products, including oral-care, skin-care, pharmaceuticals, medical devices, and diagnostics. It has a strong balance sheet, with almost $31 billion in cash and total debt of just $18.4 billion. Net profit margins over the last 10 years have averaged over 20%. The dividend has been increased annually for 50 years, with a current annual payout of $2.44 per share resulting in a 3.6% yield. Analysts expect the company to earn about $5.07 per share this year and $5.46 in 2013, compared with $5.00 in 2011.
Lockheed Martin (LMT) is the world’s largest defense contractor and the top provider of Information Technology (IT) services, systems integration and training to the U.S. Government, focusing on space and missile systems, electronics, and aeronautics. Lockheed makes the F-16, F-22 and F-35 aircraft, ballistic and other missile systems, the C-130 military transport, and Titan launch vehicles. The Joint Strike Fighter aircraft (F-35) will drive sales and earnings for the next 10-20 years, as orders for more than 3,000 for the U.S. and nine foreign countries have already been booked. After nine straight annual increases, the dividend stands at $4 per share, providing a yield of 4.3%. Earnings per share are expected to be $8.10 this year and $8.37 in 2013, up from $7.85 in 2011.
Paychex Inc. (PAYX) provides payroll services, automatic salary check deposit services, automatic payroll tax services and tax return filing services to over 560,000 small businesses nationwide through 100 offices in 36 states. It earned $1.51 per share in fiscal 2012 (ended in May), and is expected to produce $1.60 per share in profits in fiscal 2013, followed by $1.72 in fiscal 2014. The quarterly dividend of 32¢ per share results in a yield of 3.7%. Paychex has no debt whatsoever, no preferred stock and no defined benefit pension plan, so its financial strength remains very strong.
Polaris Industries (PII) designs and manufactures all-terrain vehicles (ATVs), snowmobiles, and motorcycles (under the Victory label). It also provides a variety of accessories and spare parts for its machines and has about 1,500 dealers in North America. Total debt and cash assets are identical at $325 million. The latest dividend increase (in March) boosted the quarterly payout more than 64%, from 22.5¢ to 37¢ per share, marking the 17th straight year of increases. Earnings are expected to grow from last year’s $3.20 per share to about $4.17 this year and $4.90 in 2013.
Procter & Gamble (PG) has operations in over 140 countries worldwide and its brand names include Bounce, Cheer, Comet, Downy, Ivory, Mr. Clean, Tide, Bounty, Charmin, Pampers, Old Spice, Crest, Head & Shoulders, Prell, Noxzema, Cover Girl, Clearasil, Vicks, Iams, Crisco and Gillette. It had sales of $82.5 billion and earnings of $3.95 per share in fiscal 2012 (ended in June). Earnings may be flat this year because of weakness in Europe, but should rebound to about $4.19 per share in fiscal 2014. The company extended its streak to 56 consecutive years of dividend increases, with current payout of $2.25 per share providing a 3.3% yield. Net profit margins usually average about 12 -14% per year.
United Technologies (UTX) operates six units: Otis designs and manufactures escalators, moving walkways, and passenger and freight elevators; Carrier offers residential, commercial, and industrial HVAC (heating, ventilation, and air conditioning) and refrigeration systems and equipment; UTC Fire & Security provides fire and special hazard detection and suppression systems; Pratt & Whitney supplies aircraft engines; Hamilton Sundstrand offers aerospace products Sikorsky manufactures military and commercial helicopters. UTX also develops geothermal and fuel cell power systems. A growth rate of 15% over the past 10 years has seen dividends rise from an annual 49¢ per share to the present $2.14. UTX should earn about $5.32 per share this year and $6.34 in 2013.
Verizon Communications (VZ) is one of the largest telephone systems in the world, providing communications, information and entertainment service to over 92 million customers. Verizon Wireless is a joint venture with British-based multinational mobile network operator Vodafone Group, which owns 45%. Verizon now pays a dividend of $2.06 per share, following its eighth consecutive annual increase, and yields a hefty 4.6%. Earnings for 2011 were $2.15 per share and consensus estimates call for Verizon to earn about $2.49 per share this year and $2.82 in 2013.
Waste Management (WM) is North America’s largest solid waste disposal company, providing services consisting of collection, transfer, disposal, recycling, and resource recovery, as well as hazardous waste services to commercial, industrial, municipal, and residential customers. It owns and operates 270 landfills and 345 transfer stations in North America and is building waste-to-energy plants in Virginia, Europe and China. The annual dividend, which has been increased for nine consecutive years, now totals $1.42 per share, for a yield of 4.1%. Revenues have grown from $11.8 billion in 2009 to over $13.1 billion this year and are expected to top $15.7 billion in 3-5 years. The company earned $2.12 per share in 2011 and is expected to net about $2.16 this year and $2.38 in 2013. Insiders own 9% of the 474.2 million outstanding shares, which is down from 628 million in 2001.
For information about opening DRIP accounts, go to directinvesting.com or call us at 1-800-388-9993.
Wishing you success in your investing and beyond,
Editor of Dick Davis Investment of the Week
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