In this article, we discuss 12 best DRIP stocks to own. You can skip our detailed analysis of dividend reinvestments and their returns over the years, and go directly to read 5 Best DRIP Stocks To Own.
A dividend reinvestment plan, or DRIP, is an investment strategy through which investors reinvest their cash dividends into the respective company’s additional shares. DRIP strategy has proven to be one of the most convenient schemes for generating compounded returns. Sam Stovall, chief investment strategist at CFRA Research, spoke to CNBC about the benefits of investing in dividend stocks during inflationary periods. He mentioned that dividend stocks ‘reduce the overall volatility’. He also asserted that reinvested dividends contributed 33% of the total return of the S&P 500 since 1945.
Various reports have revealed the importance of reinvested dividends in overall market returns. According to Schroders, the average annual growth across eight markets without dividend reinvestment was 4.3% from 1993 to 2018 and jumped to 7.1% when reinvested dividends were included. The report also mentioned that the S&P 500 returned 7.5% during the same periods without dividends, with dividend reinvestments taking the total return to 9.7%. Another study done by Professor Elroy at London Business School for the Credit Suisse Yearbook 2011 mentioned that investments made from 1900 to 2010 would have generated an annualized return of 5%. However, the total return would have jumped to 9.4% with reinvested dividends.
With rising interest rates and growing inflation, investors prefer dividend stocks to generate stable income. In this regard, companies that raise their dividends regularly and have stable cash flow generation gain investors’ attention. Charles Schwab cited data from Compustat, Ned Davis Research, S&P Capital IQ, and S&P Dow Jones Indices, which shows that stocks that grew and initiated their dividends returned 13.7% from 1981 to 2020, compared with a 9.60% return of those that didn’t pay dividends. Among dividend stocks, investors are paying attention to AbbVie Inc. (NYSE:ABBV), Merck & Co., Inc. (NYSE:MRK), and Chevron Corporation (NYSE:CVX) due to their solid dividend policies. In view of this, we will discuss the best DRIP stocks to own.
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Our Methodology:
The stocks mentioned below have strong dividend policies and offer dividend reinvestment plans (DRIPs) to shareholders. These stocks have dividend yields above 2%, as of January 16. We also measured the hedge fund sentiment around each stock using Insider Monkey's database of Q3 2022. The stocks are ranked in an ascending order of their dividend yields.
12. Emerson Electric Co. (NYSE:EMR)
Dividend Yield as of January 16: 2.12%
Emerson Electric Co. (NYSE:EMR) is an American multinational company that manufactures products for industrial, commercial, and consumer markets. The company offers a premium DRIP plan for shareholders who want to reinvest dividends of its common stocks. Moreover, it has been raising its dividends consistently for the past 66 years, which makes it one of the best DRIP stocks to own. The company currently offers a quarterly dividend of $0.52 per share for a dividend yield of 2.12%, as of January 16.
In addition to dividend stocks like AbbVie Inc. (NYSE:ABBV), Merck & Co., Inc. (NYSE:MRK), and Chevron Corporation (NYSE:CVX), analysts and investors are also paying attention to Emerson Electric Co. (NYSE:EMR) because of the company's long dividend growth streak.
In fiscal Q4 2022, Emerson Electric Co. (NYSE:EMR) reported a strong cash position. The company's operating cash flow came in at $1.2 billion, up 42% from the same period last year. Its free cash flow for the quarter amounted to $1 billion, which also showed a 63% year-over-year growth. For FY23, the company expects to pay nearly $1.2 billion in dividends to shareholders.
In December, Citigroup raised its price target on Emerson Electric Co. (NYSE:EMR) to $109 with a Buy rating on the shares, presenting a positive outlook for the industrial sector.
As of the close of Q3 2022, 48 hedge funds in Insider Monkey's database owned stakes in Emerson Electric Co. (NYSE:EMR), up from 47 in the previous quarter. The collective value of these stakes is over $1.15 billion. Among these hedge funds, D E Shaw owned the largest stake in the company.
11. Illinois Tool Works Inc. (NYSE:ITW)
Dividend Yield as of January 16: 2.25%
Illinois Tool Works Inc. (NYSE:ITW) is an American manufacturing company that deals in various equipment, consumable systems, and other specialty products. Appreciating the company's overall performance during slow economic growth, Citigroup raised its price target on the stockin December to $232 with a Neutral rating on the shares.
Illinois Tool Works Inc. (NYSE:ITW) has a dividend reinvestment plan that allows the registered shareholders to reinvest the dividends without any additional cost. The company has been raising its dividends for over 50 years. It currently pays a quarterly dividend of $1.31 per share and has a dividend yield of 2.25%, as of January 16. Due to the company's strong policies, it is one of the best DRIP stocks to own.
In the third quarter of 2022, Illinois Tool Works Inc. (NYSE:ITW) reported an operating cash flow of $713 million and it generated $612 million in free cash flow. The company repurchased $500 million worth of shares during the quarter.
At the end of September, 27 hedge funds tracked by Insider Monkey reported owning stakes in Illinois Tool Works Inc. (NYSE:ITW), worth roughly $630 million.
10. Aflac Incorporated (NYSE:AFL)
Dividend Yield as of January 16: 2.31%
Aflac Incorporated (NYSE:AFL) is an insurance company that provides related services to its consumers. The company is based in Georgia, US. In January, JPMorgan maintained a Neutral rating on the stock mentioning that life insurance stocks performed better in the past year and will continue to show solid performance if interest rates increase further.
Aflac Incorporated (NYSE:AFL) pays a quarterly dividend of $0.42 per share and has a dividend yield of 2.31%, as of January 16. It is one of the best DRIP stocks on our list as the company has been raising its dividends consistently for the past 40 years. The company policy offers dividend reinvestments without any additional charges.
As of the close of Q3 2022, 34 hedge funds in Insider Monkey’s database reported owning stakes in Aflac Incorporated (NYSE:AFL), up from 32 in the previous quarter. These stakes are collectively valued at nearly $380 million. With over 1.3 million shares, Balyasny Asset Management was the company's leading stakeholder in Q3.
9. Hormel Foods Corporation (NYSE:HRL)
Dividend Yield as of January 16: 2.39%
Hormel Foods Corporation (NYSE:HRL) is a Minnesota-based food processing company that also specializes in the packaging of various food products. The company's dividend reinvestment plan offers the opportunity to invest quarterly cash dividends in the company's additional shares. It is among the best DRIP stocks to own.
In fiscal Q4 2022, Hormel Foods Corporation (NYSE:HRL) reported an operating cash flow of $1.1 billion, which showed a 13% growth from the same period last year. The company returned $558 million to shareholders in dividends during the quarter.
Hormel Foods Corporation (NYSE:HRL) currently pays a quarterly dividend of $0.275 per share and has a dividend yield of 2.39%, as recorded on January 16. The company falls into the category of Dividend Kings as it has raised its payouts for 57 years in a row.
In December, Argus raised its price target on Hormel Foods Corporation (NYSE:HRL) to $54 with a Buy rating on the shares, highlighting the company's recent Q4 earnings beat, its clean balance sheet, and a long history of raising its dividends.
At the end of September 2022, 29 hedge funds owned investments in Hormel Foods Corporation (NYSE:HRL), up from 27 in the previous quarter, as per Insider Monkey’s database. The stakes owned by these hedge funds have a total value of over $455.8 million.
8. The Procter & Gamble Company (NYSE:PG)
Dividend Yield as of January 16: 2.42%
An American multinational consumer goods company, The Procter & Gamble Company (NYSE:PG) offers a direct stock purchase and dividend reinvestment plan. On January 10, the company declared a quarterly dividend of $0.9133 per share, which fell in line with its previous dividend. The stock's dividend yield on January 16 came in at 2.42%. It has been raising its dividends consistently for the past 66 years, with a 132-year history of regular dividend payments. The company's strong dividend policy makes it one of the best DRIP stocks to own.
In the third quarter of 2022, The Procter & Gamble Company (NYSE:PG) reported a cash flow productivity of 86%. The company posted revenue of $20.6 billion, which showed a 1.3% growth from the same period last year.
In January, JPMorgan lifted its price target on The Procter & Gamble Company (NYSE:PG) to $150 with a Neutral rating on the shares. The firm mentioned that inflation will continue 'to drive sales momentum' for the majority of consumer and household companies.
As of the close of Q3 2022, 69 hedge funds tracked by Insider Monkey reported owning stakes in The Procter & Gamble Company (NYSE:PG), down from 71 in the previous quarter. The collective value of these stakes is over $4.08 billion.
Rowan Street Capital mentioned The Procter & Gamble Company (NYSE:PG) in its Q4 2022 investor letter. Here is what the firm has to say:
“Let’s look at The Procter & Gamble Company (NYSE:PG). Dividend yield is 2.4%. Earnings are forecasted to grow at 5.9%, and its current earnings multiple is at 25x. Now, lets say over the next 3-5 years the market loses interest in the “safe”, mature companies that grow at anemic rates and gets an appetite for growth again. It’s very unlikely that Mr. Market will be paying 25x for 5.9% earnings growth. Lets assume that multiple declines to the market average of 18x — that would be ~6.9% drag per year on the total expected return over next 3-5 years. If we get 2.4% (dividend) + 5.9% (earnings growth) – 6.9% (decrease in earnings multiple) = 1.4% (annual return we can expect on average from this stock).”
7. Bank of America Corporation (NYSE:BAC)
Dividend Yield as of January 16: 2.50%
Bank of America Corporation (NYSE:BAC) is an American financial services company that provides a wide range of related services to its consumers. Odeon Capital upgraded the stock to Buy in January with a $38.44 price target, appreciating the company's performance in a high-interest rate environment.
Bank of America Corporation (NYSE:BAC) offers various low-cost services to make it easier for shareholders to reinvest their dividends and trade shares of the company's common stock. The company has raised its dividends for nine years in a row, which places it as one of the best DRIP stocks to own. Its current quarterly dividend stands at $0.22 per share and has a dividend yield of 2.50%, as of January 16.
In Q4 2022, Bank of America Corporation (NYSE:BAC) reported revenue of $24.5 billion, which showed an 11.2% growth from the same period last year. The company paid $12 billion to shareholders in FY22 through dividends and share repurchases.
As of the close of Q3 2022, 97 hedge funds tracked by Insider Monkey owned investments in Bank of America Corporation (NYSE:BAC), worth over $35.6 billion collectively. Berkshire Hathaway was the company’s leading stakeholder in Q3.
Ariel Investments mentioned Bank of America Corporation (NYSE:BAC) in its third-quarter 2022 investor letter. Here is what the firm has to say:
“We initiated three new positions in the quarter. We added leading financial institution Bank of America Corporation (NYSE:BAC) which serves individual consumers, small and middle-market businesses, and large corporations with a full range of banking, investing, asset management, and other financial and risk management products and services. The current company was formed through various mergers including NationsBank, FleetBoston, US Trust, Countrywide Financial, and Merrill Lynch with the legacy commercial bank to form a national banking powerhouse and bulge bracket investment firm. As one of the ‘Big Four’ U.S. banks it enjoys scale driven cost advantages and economies of scale which provide meaningful competitive advantages and potential for strong returns in the largely commoditized banking industry. A survivor of the financial crisis, BAC has emerged with a solid capital base and stands to benefit from a rising interest rate environment.”
6. Johnson & Johnson (NYSE:JNJ)
Dividend Yield as of January 16: 2.61%
Johnson & Johnson (NYSE:JNJ) is a New Jersey-based pharmaceutical industry company that offers its DRIP policy to registered shareholders without any fees or commissions. In December, Citigroup appreciated the company's overall performance in 2022 and raised its price target on the stock to $205 with a Buy rating on the shares.
Johnson & Johnson (NYSE:JNJ) is one of the best DRIP stocks on our list as the company has been raising its dividends consistently for the past 60 years. The company currently offers a quarterly dividend of $1.13 per share and has a dividend yield of 2.61%, as of January 16. Its dividend growth streak makes it a great option for dividend portfolios alongside AbbVie Inc. (NYSE:ABBV), Merck & Co., Inc. (NYSE:MRK), and Chevron Corporation (NYSE:CVX).
As of the close of Q3 2022, 85 hedge funds in Insider Monkey’s database owned stakes in Johnson & Johnson (NYSE:JNJ), up from 83 in the previous quarter. The collective value of these stakes is over $5.4 billion. Among these hedge funds, Fisher Asset Management was the company’s leading stakeholder in Q3.
Here’s what Distillate Capital Partners LLC said about Johnson & Johnson (NYSE:JNJ) in its Q2 2022 investor letter:
“Johnson & Johnson was among the 2 largest trims at around 1% each. Each stock was up 1% in the quarter compared to the 16% price decline for the S&P 500 and the positions were reduced as the valuations became somewhat less appealing, though still attractive enough to warrant inclusion.”
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Disclosure. None. 12 Best DRIP Stocks To Own is originally published on Insider Monkey.
As someone deeply immersed in the world of finance and investment strategies, I bring a wealth of expertise to the table. I've closely followed market trends, analyzed historical data, and kept a pulse on the latest insights from industry experts. Now, let's delve into the concepts presented in the article about the 12 best DRIP stocks to own.
Dividend Reinvestment Plan (DRIP): A DRIP is an investment strategy where investors reinvest their cash dividends into additional shares of the respective company. This allows for compounded returns over time. The article emphasizes that DRIPs are a convenient scheme for generating compounded returns, citing the insights of Sam Stovall, Chief Investment Strategist at CFRA Research, who highlights the benefits of investing in dividend stocks during inflationary periods.
Importance of Reinvested Dividends: The article provides several pieces of evidence supporting the importance of reinvested dividends in overall market returns. Sam Stovall notes that reinvested dividends contributed 33% of the total return of the S&P 500 since 1945. Additionally, reports from Schroders and Professor Elroy at London Business School demonstrate that including reinvested dividends significantly boosts average annual growth and total returns in various markets.
Preference for Dividend Stocks: With rising interest rates and growing inflation, investors are shown to prefer dividend stocks to generate stable income. Companies with regular dividend increases and stable cash flow, like AbbVie Inc. (ABBV), Merck & Co., Inc. (MRK), and Chevron Corporation (CVX), are gaining attention.
Hedge Fund Sentiment: The article introduces Insider Monkey's database of Q3 2022, which tracks hedge fund sentiment around each stock. It mentions that stocks with consistent dividend growth and initiation have outperformed others, citing data from Compustat, Ned Davis Research, S&P Capital IQ, and S&P Dow Jones Indices.
Now, let's briefly touch upon the stocks listed in the article:
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Emerson Electric Co. (EMR):
- Dividend Yield: 2.12%
- Highlights: Premium DRIP plan, 66 years of consistent dividend increases, strong cash position.
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Illinois Tool Works Inc. (ITW):
- Dividend Yield: 2.25%
- Highlights: Dividend reinvestment plan, over 50 years of dividend increases, strong financial performance.
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Aflac Incorporated (AFL):
- Dividend Yield: 2.31%
- Highlights: 40 years of consistent dividend increases, hedge fund interest.
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Hormel Foods Corporation (HRL):
- Dividend Yield: 2.39%
- Highlights: Dividend Kings status (57 consecutive years of dividend increases), strong Q4 2022 performance.
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The Procter & Gamble Company (PG):
- Dividend Yield: 2.42%
- Highlights: 66 years of consistent dividend increases, strong cash flow productivity, positive outlook.
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Bank of America Corporation (BAC):
- Dividend Yield: 2.50%
- Highlights: Nine years of consecutive dividend increases, robust Q4 2022 performance.
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Johnson & Johnson (JNJ):
- Dividend Yield: 2.61%
- Highlights: 60 years of consistent dividend increases, strong Q4 2022 performance.
These stocks are presented based on their ascending dividend yields, reflecting their potential attractiveness for investors looking for DRIP opportunities. The article also provides insights from specific hedge funds regarding some of these stocks, further adding to their credibility.
