Dividend reinvestment plans represent an excellent vehicle for investing for the long term. And investing for the long term usually means investing for retirement, explains Chuck Carlson, dividend reinvestment expert and editor of DRIP Investor.
Yet, company-sponsored DRIPs are not an easy vehicle to use when investing in Individual Retirement Accounts (IRAs). Remember that when you enroll in a DRIP, you are the shareholder of record. In other words, the shares are registered in your name.
This differs from buying stock via a brokerage firm where your ownership is recorded in what’s called “street” name (i.e., the name of the broker).
Now, in order to open an IRA, you have to have a custodian for the account. Unfortunately, brokerage firms and mutual-fund entities are not apt to provide IRA custodial services for securities that are not held in street name.
Thus, the catch-22 — you want to own DRIPs in an IRA, but traditional IRA custodians won’t let you.
Fortunately, there are a couple of workarounds. One is to invest via reinvestment plans offered by brokerage firms. Indeed, most brokerage firms will allow investors to reinvest dividends in shares held in street name at the broker, and you can do this in stocks held in an IRA.
Mind you, such plans are created by the brokers and are not the same as company-sponsored DRIPs. However, the brokerage reinvestment option is an easy way to dividend reinvest in stocks held in an IRA at your broker.
Another option is to invest in company-sponsored DRIPs that offer an IRA option in their plans.
DRIP IRAs work in the same fashion as all IRAs. You have to have earned income to contribute to an IRA. Annual contribution limits in 2022 are $6,000, with investors 50 and older being able to make an additional “catch-up” contribution of $1,000.
You can roll over existing IRAs into DRIP IRAs if you choose. Also worth mentioning is that these select DRIPs typically offer both traditional and Roth IRA options in their plans.
There are some issues to consider before initiating DRIP IRAs:
- You can only set up one IRA per DRIP. In other words, if you want to open IRAs in one or more of the 11 stocks featured below, you will have to open separate IRAs with each DRIP.
- DRIP IRAs come with fees, including an annual administrative fee (usually $25 to $45) plus fees on distributions and terminations. Make sure you understand all of the fees by obtaining the brochure and enrollment information from Computershare by calling the IRA line at (800) 597-7736 or writing, The IRA Program, c/o Computershare Trust Company N.A., PO Box 2175, Milwaukee, Wisconsin 53201-2175.
Despite the small number of DRIPs offering IRAs, there are several with attractive long-term potential. I have been a long-time shareholder of Exxon Mobil (XOM) and am encouraged by the stock’s price action over the last 14 months. I consider the stock a solid holding in the energy sector.
Telecommunications stocks are represented on the list, with AT&T (T) and Verizon (VZ) both offering DRIP IRAs. AT&T has registered a nice rebound so far in 2022. Verizon has rebounded as well. Of the two, my preference is Verizon, which is currently yielding nearly 5%.
Utilities are represented on the list with Essential Utilities (WTRG) and American Electric Power (AEP). Formerly known as Aqua America, Essential Utilities provides primarily water and wastewater utility services to some five million customers across 10 states.
American Electric Power operates seven regional utilities serving some 11 states. The company’s electricity transmission network stretches some 40,000 miles and is the largest in the U.S.
Tobacco is well represented in the list with Altria (MO) and Philip Morris International (PM). Altria currently offers a hefty 7% yield, while Philip Morris yields nearly 5%. Of the two, I favor Philip Morris. In fact, I view Philip Morris as among the best total-return investments among the DRIPs offering IRAs.
Another favorite listed here is McDonald’s (MCD). McDonald’s is the sort of “defensive” stock that should gain support if markets turn volatile. Campbell Soup (CPB), Ford (F), and Walmart (WMT) round out the DRIPs offering IRAs.
I like Ford’s progress in the electrical vehicle space. And I like the stock’s valuation versus other EV plays. Campbell Soup’s yield of more than 3% may draw investors. Still, I am not that excited about the stock’s long-term prospects. While Walmart may be pressured in the near term, I think the stock represents one of the better holdings in the retail sector.