Anyone and everyone with a few bucks in the stock market should know what a DRIP, or dividend reinvestment plan, is. And anyone with a long-term time horizon should simply buy Exxon Mobil Corporation (NYSE:XOM) and Chevron Corporation (NYSE:CVX) stock, set up a DRIP, sit back and wait patiently.
The returns aren’t likely to disappoint.
Here’s why I think XOM and CVX — especially when coupled with a DRIP — are such unique opportunities.
How A DRIP Works
Dividend reinvestment plans are simple: instead of automatically depositing dividend payments into your brokerage account, DRIPs automatically reinvest those payments back into the dividend stocks themselves.
You can sign up for a DRIP through your broker or, depending on the stock, through the company itself. Investopedia has an excellent primer on the technicalities of DRIPs you might want to read before taking any action.
Anyhow, if you beat me to the punch by a few years and set up a DRIP in either XOM stock or CVX stock some time ago, you’re well aware that you’ve been crushing the S&P 500 like Joey Chestnut crushes hot dogs.
What If: DRIP Investing With XOM and CVX
Let’s say you set up a DRIP with XOM stock 30 years ago. If you put $10,000 in that DRIP in April of 1985, that money would be worth more than $400,000 today.
No, I didn’t misplace a decimal.
The return of the S&P 500 over the same time frame, with dividends reinvested, would still have been remarkable — your $10,000 would’ve turned into $230,00 — but you would’ve left about $170k on the table.
But why exactly what XOM such a good candidate for a DRIP — and why does it remain one going forward? The short answer is that compound interest is a magical thing, and with all the dividend payments you received over the years with Exxon stock, you put that money back to work. Oh, and XOM stock pays a handsome, 3.2% dividend that’s been rising for 32 consecutive years now.
The XOM stock price stood at a split-adjusted $6.55 per share exactly 30 years ago. Today, it pays out $2.76 per share in dividends alone. With today’s dividend applied to yesteryear’s stock price, XOM would pay a 42% dividend yield.
Just imagine: 42% percent — and rising — on your original investment. Not too shabby.
CVX stock illustrates the power of DRIP investing pretty powerfully, too. Chevron is also a perennial dividend-raiser, with 29 straight years of dividend growth to its name. In the 25 years between 1988 and 2013, a $10,000 investment would’ve transformed into $253,657 with dividends reinvested … and “only” $136,437 if you simply took a dividend check each quarter.
With the energy sector beaten up over the last year as oil prices took a severe stumble, XOM and CVX trade at attractive multiples of 11.5 and 10.9, respectively. With each stock paying handsome dividends and each company unlikely to go anywhere in the long-term, they both remain excellent opportunities to set up a DRIP … and promptly forget about them.
As of this writing John Divine held no positions in any of the stocks mentioned. You can follow him on Twitter at @divinebizkid or email him at email@example.com.