Build a Socially Responsible Portfolio with DRIPs

07/01/2020 5:00 am EST

Focus: STRATEGIES

Charles Carlson

Editor, DRIP Investor

Socially responsible investing (SRI) has become somewhat of a buzz phrase within the investment community, explains Chuck Carlson, a leading expert on dividend reinvestment plans and editor of DRIP Investor.

The term covers a host of investing styles, all centered around the idea of investing in companies with outstanding environmental, social, and governance (ESG) attributes and excluding companies whose products have negative social or environmental impacts.

SRI — socially responsible investing — has become increasingly popular with investors. By one estimate, roughly one out of every four dollars in assets under management is managed with an eye toward SRI, and the assets tied to SRI investing have grown more than 35% since 2016.

To be sure, while the idea of socially responsible investing has clearly caught the attention of investors and professional money managers, it is not exactly accurate to say that SRI investing speaks with one voice.

Major differences of opinions exist as to what constitutes a “socially responsible” company. Is a cable company that does not pollute but may distribute pornography over its lines socially responsible? Is a utility company that generates its energy sources not only via “clean” energies, such as wind and solar, but also via coal and natural gas, socially responsible?

What about a company that doles out millions of dollars a year in philanthropy but struggles with corporate governance?

And finally, what about a company who invests its cash assets in U.S. Treasuries — the same U.S.Treasuries that help to fund a social safety net for our country’s citizens, but also the same Treasuries that are used to fund our war effort — is that company “socially responsible?”

You get my point. SRI is truly in the eye of the beholder. And because SRI investing is so truly personal, it makes sense that SRI investors will probably scratch their SRI itch better investing in individual stocks than a mutual fund.

Indeed, individual stocks are much easier to vet along personal SRI preferences versus a mutual fund holding hundreds of “socially responsible” companies. The good news is that many quality companies that seemingly fit into the SRI camp offer direct-purchase plans, allowing any SRI investor, regardless of the size of his or her pocketbook, an easy way to build an SRI portfolio.

A good starting point for creating a “watch list” of potential SRI stocks is to start with one of the first indexes devoted to SRI investing, the MSCI KLD 400 Social Index. Launched in May 1990 as the Domini 400 Social Index, the MSCI KLD 400 Social Index is maintained in two stages.

First, securities of companies involved in nuclear power, tobacco, alcohol, gambling, military weapons, civilian firearms, GMOs, and adult entertainment are excluded. Then additions are made based on considerations of ESG performance, sector, and size.

To develop the tables below, I took the stocks in the MSCI KLD 400 Social Index and pulled out all of the stocks that offer direct-purchase plans.

I then took that list and highlighted those stocks with an Overall Quadrix score of at least 60. (Quadrix is my firm’s proprietary stock rating system that looks at more than 90 different metrics to score more than 4,000 stocks. Quadrix scores are percentile rankings, with 100 being the highest score.)

This last step — aligning SRI with investment quality — is very important and probably too often overlooked by SRI investors. It is probably worth reiterating that this list represents a starting point for investors who are interested in SRI investing.

The stocks listed here may or may not meet your exact specifications for SRI investing, which is why you will need to vet them carefully before buying. But hopefully some of the vetting has already been done for you by MSCI KLD 400 Social Index.

One sector that typically screens quite well for SRI stocks is technology, and a number of quality stocks are highlighted in the list. I especially like Applied Materials (AMAT).

Other favorites in the technology space include Cisco Systems (CSCO), Intel (INTC), and Microsoft (MSFT). I’m also a big fan of Alphabet (GOOGL) and would include that in any SRI portfolio.

Among health-care stocks, Bristol-Myers Squibb (BMY) is well situated for new buying and combines solid income — the stock yields nearly 3% — with market-beating appreciation potential. Finally, two additional names that would be well-suited for SRI investors are S&P Global (SPGI) and Verizon (VZ).

Remember that all of the stocks in the table offer direct-purchase plans whereby any investor may buy the first share and every share directly. Below are the stocks, their symbols and their sector.

Intel (INTC) — Semiconductors
Intercontinental Exchange (ICE) — Financial Exchanges
Interface (TILE) — Office Services
Jones Lang LaSalle (JLL) — Real Estate Services
Kellogg (K) — Packaged Foods
Kimberly-Clark (KMB) — Household Products
Kraft Heinz (KHC) — Packaged Foods
Lincoln National (LNC) — Life and Health Insurance
Lowe's (LOW) — Home Improvement
MDU Resources (MDU) — Utilities
Merck (MRK) - Pharmaceuticals
Microsoft (MSFT) — Systems Software
New Jersey Resources (NJR) — Gas Utilities
Norfolk Southern (NSC) — Railroads
Omnicom (OMC) — Advertising
Principal Financial (PFG) — Life and Health Insurance
Quest Diagnostics (DGX) — Health Care Services
Regions Financial (RF) — Regional Banks
Rockwell Automation (ROK) — Electrical Components
S&P Global (SPGI) — Financial Exchanges
Snap-on (SNA) —Industrial Machinery
State Street (STT) — Asset Management
Tractor Supply (TSCO) — Specialty Stores
Travelers Cos. (TRV) — Property & Casualty Insurance
Union Pacific (UNP) — Railroads
Verizon Communications (VZ) — Telecom Services

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