For investors searching for higher yields, there is the challenge in analyzing whether dividends are...
The Best Dow DRIPs
10/23/2013 10:00 am EST
Chuck Carlson, editor of DRIP Investor, explains the benefits of dividend reinvestment plans and highlights the best DRIPs among the Dow 30.
Steve Halpern: We are here today with Chuck Carlson, a leading dividend investing expert and editor of DRIP Investor. How are you doing Chuck?
Chuck Carlson: I'm fine, how are you?
Steve Halpern: Great. First off, for listeners who aren't familiar with DRIPs, could you briefly explain what dividend reinvestment plans are and how they work?
Chuck Carlson: Sure, dividend reinvestment plans are programs offered by about 800 companies, that allow investors to buy stock directly from the company. You buy stock in two ways in these plans.
First, many companies allow you to reinvest the dividends, hence the name dividend reinvestment. Where, instead of the company sending you a dividend check, they keep that money and then go into the market to buy additional shares of stock for you, that's one way you buy in the plan.
The second way, is that, in most dividend reinvestment plans, there is what's called an optional cash investment feature, where you can also send additional money directly to the company, or an agent of the company, who in turn will take that money and buy full and fractional shares for you.
They are great plans for: a) dealing directly with companies, so you don't necessarily have to have a brokerage account; b) doing it in a very low-cost way, many DRIPs have little or no fees that they charge, and then finally, c) invest in amounts that make sense for your own pocketbook, where you can typically invest anywhere from $25 to $250, to even $250,000, if you have deep enough pockets. It allows anyone to really mold an investment program based on your own financial restraint.
Steve Halpern: So, these really aren't the kind of investments that a trader would look at, but rather, somebody who's looking to build a position over the long term.
Chuck Carlson: Exactly, the programs are not structured for really trading, for darting in and out of stocks. They are structured for buying and accumulating good stocks over a period of time.
They are typically what you would consider to be more, kind of, buy and hold investments, as opposed to investments where you're going to be flipping in and out of the stock.
Steve Halpern: In your latest newsletter you feature an article called The Best DRIPs in the Dow, and you note that, from a DRIP investor's perspective, the Dow is a fertile hunting ground in your words. How common are DRIPs among the Dow 30?
Chuck Carlson: Well, 27 of the 30 stocks in the Dow Jones Industrial Average offer some form of a dividend reinvestment plan.
The only three Dow stocks that do not are actually, interestingly, two of the newest members, Goldman Sachs (GS) and Visa (V), and the third stock is UnitedHealth Group (UNH), which is also a fairly new member to the Dow.
Every other Dow stock has some form of a plan, either a traditional dividend reinvestment plan, where you can invest directly, but you'll need to be an owner of at least one share before you can invest directly in the plan, or companies that are offering, what I call, direct purchase plans, where you can make even your initial purchase of stock directly from the company.
Indeed, 22 of the 30 stocks in the Dow allow anyone to make even their initial investments directly in those companies, so you don't need a broker to get started and the minimum initial investment to get started in most of the plans is just $250 or less.
Steve Halpern: So, let's look at some of the individual DRIPs among the Dow stocks, and one you consider an excellent buy and hold play is Exxon Mobil (XOM). Could you tell us a little about that?
Chuck Carlson: Sure, I've been a long-time owner of the stock; it's been one of my personal longest holdings. I think I've had it for over 20 years.
It's the classic kind of, what I call, Steady-Eddie stock, where it's never at the top of the leader board in a given year, but it's one that just kind of chugs along, churns out good dividend growth, you get a decent yield and reasonable capital gains potential, and over the long period of time it's really put up nice returns.
Exxon has a direct purchase plan where any investor can make even their initial purchase directly. The minimum initial investment is just $250.
Subsequent investments after you've made the initial investment (and these are strictly optional), the minimum is just $50, so, as you can see, you can invest $50 in a stock that trades for about $88, which means you can actually buy fractional shares of stock, much like kind of buying stock on the installment plan if you think of it.
Furthermore, Exxon has a very friendly plan, in a sense that, they don't charge any fees to buy stock through the plan, and they even have, as part of their plan, an IRA option where you can invest directly with Exxon and earmark those funds to go directly into an IRA that Exxon will provide custodial services on, so it's a very user-friendly plan in a stock that typically has done exceptionally well over the long-term.
Steve Halpern: You also put Disney (DIS) in this Steady-Eddie category. Could you explain the attraction there?
Chuck Carlson: Yeah. Some of my favorite sectors for long-term growth are media, and entertainment, and leisure, and Disney encapsulates really all of those sectors in one company.
They've got, obviously, their theme park business and movie business, but they have a substantial broadcasting business with their ABC Network, as well as, kind of, the crown jewel of the cable network, ESPN, which is a Disney property.
It's a company that really ticks off a lot of boxes in terms of sectors that I like. Strong consumer brand name, it's just a good solid company that I think will continue to trend higher over the long-term.
They have a plan where you can make even your initial investment directly; the minimum is just $250. Furthermore, Disney represents kind of a perfect stock if you wanted to introduce a child or a grandchild to this form of investing and get them into a stock that a child can certainly relate to.
Steve Halpern: Now, among the new entrants to the Dow, you point to Visa as a favorite, but, as you noted, they don't have a dividend reinvestment plan in place. Is that still something you'd recommend?
Chuck Carlson: I would. Again, at the end of the day, dividend reinvestment plans are really vehicles by which you buy stock, but just because a company has a dividend reinvestment plan, doesn't necessarily make it a great company or not a great investment.
There are many good companies out there that have DRIPs, but there are also many excellent investments that don't offer the plans, an investor should still consider, and one of those is Visa, which is among the newest members of the Dow.
It does not have a plan, so you would have to Visa through a broker, but nevertheless, it is a favorite of mine among the Dow stocks. It's one of those companies that's often misunderstood by investors, who think it's basically a credit card company.
The reality is, Visa does not issue credit cards, nor does it extend credit, so it's not vulnerable to bad credit from its customers. Visa is really a technology company that takes a piece of every credit and debit payment that runs across its technology network that it processes.
To kind of give you an idea—in the second quarter of this year, the company processed 15 billion transactions, making a smidgeon on each of those 15 billion. They have a very strong competitive position in their group and it's one of those stocks that I just think it going to continue to do well.
Steve Halpern: Well, we really appreciate you joining us today, and it's good to hear an advisor talk about such high-quality blue chip companies. Thank you.
Chuck Carlson: Thank you, Steve.
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