Producing sustainable and growing income over time from dividend stocks can be accomplished in a variety of ways. One way that many investors may not think of right away is Dividend Reinvestment Plans, or DRIPs.
A DRIP is a way for investors to simply and automatically reinvest their dividends from a stock back into buying more shares of that stock. Over time, this means that dividends turn into a larger number of shares for the investor, which then produces ever-higher dividend income over time.
We believe the best DRIP stocks are those that offer no-fee DRIP plans, as well as long streaks of growing dividends. The Dividend Aristocrats are a great place to start when looking for DRIP stocks as they have at least 25 consecutive years of dividend increases.
In this article, we’ll take a look at 3 Dividend Aristocrats for no-fee DRIPs.
My top picks are:
Best DRIP Dividend Stocks: 3M Company (MMM)
3M is a highly diversified global industrial conglomerate that produces a broad catalog of consumable products. The company has leverage in the safety, healthcare, transportation, electronics, and consumer products markets. That kind of size and scale attracts dividend investors for good reason.
Size, scale and diversity lead to steadier revenue and earnings over time, which then allows the company to pay ever-rising dividends. Indeed, 3M has one of the best dividend increase streaks of any company in the market at a staggering 62 years.
3M doesn’t just have an extended dividend increase streak going; the increases also have been quite sizable. In the past decade, 3M has averaged 10.3% dividend growth annually as the payout has more than doubled in that time frame. That kind of dividend growth can be difficult to find over long periods of time, and 3M has a six-decade history of producing rising income for shareholders, which makes it a perfect DRIP stock.
The company doesn’t just offer payout growth; it offers dividend safety as well. After all, no company can pay out a very high rate of earnings and increase its dividend for more than six decades. No matter how good a company is, it will inevitably face years of earnings declines due to recessions or other factors.
Indeed, 3M saw its 2020 earnings decline slightly against 2019 due to the slowdown from Covid-19, but its payout ratio for 2020 – even on declining earnings – was just 67%. After 62 years of the payout rising, 3M is still in a strong position when it comes to dividend safety, and when assessing candidates for DRIP, this is key.
3M checks all the boxes when it comes to DRIP; it has a very long history of increasing dividends, its current dividend is safe, it is highly diversified, and it has shown the ability to weather recessions and produce long-term earnings growth. For these reasons, 3M is one of the best dividend stocks for your DRIP.
Hormel Foods (HRL)
Hormel Foods our next DRIP candidate, has been around since 1891 and has grown into a major competitor in the processed food category.
Hormel has been primarilly processing meat for much of its history, but has expanded via acquisitions into other categories such as nut-butters in recent years. Hormel also has scale on its side, producing about $10 billion in annual revenue.
While not quite as long as 3M’s dividend increase streak, Hormel is still quite impressive with a 55-year dividend increase streak of its own. That puts Hormel in rarified company in terms of dividend growth longevity, which is part of what makes it a great DRIP candidate.
Hormel’s ten-year dividend increase rate has averaged more than 13% annually, so Hormel isn’t producing token increases for the sake of keeping its dividend increase streak alive. This company is serious about returning capital to shareholders.
Hormel was able to boost its payout by so much because ten years ago, the company’s payout ratio was only about 25% of earnings. Today, even after the impressive run of 13% annual increases, Hormel’s dividend is still very safe at just 54% of projected 2021 earnings. Combined with Hormel’s natural recession resilience from its consumer staple product catalog, we see Hormel as a strong DRIP candidate.
Our last stock is Aflac, an insurer that offers a variety of products, including life, dental, vision, disability, and critical illness products.
The vast majority of its earnings come from Japan, with the balance accruing from the U.S., so Aflac has a much different earnings profile than the other two stocks we’ve looked at.
Aflac has been a strong dividend growth stock in its own right as well, increasing dividends for 38 consecutive years. The company has increased its dividend by an average rate of 6.6% annually in the past decade, which has been commensurate with its earnings growth over that period.
While insurers tend to offer rather volatile earnings, Aflac’s earnings have been remarkably steady and have grown over time as well. This affords the company the runway to continue to increase the payout without undue stress on its payout ratio.
Indeed, Aflac is slated to pay out just 24% of this year’s earnings in the form of dividends, so its payout is tremendously safe. Not only is Aflac’s payout very safe, but a payout ratio that is this low means there is a very long runway for continued increases, even during periods when earnings decline. This is a very nice feature to have in a DRIP stock.
The Bottom Line on DRIP Stocks
Investors with long-term horizons should find the list of no-fee DRIP stocks quite appealing. Narrowing that list down even further, companies with durable business models, growing earnings, safe dividends, and the willingness of the management team to return ever more cash to shareholders over time are the best candidates for DRIP investors.
We like 3M, Hormel, and Aflac for DRIP investors because they all offer safe payouts, recession resilient business models, growing earnings, and decades-long dividend increase streaks. With no-fee DRIP in place, investors can enjoy ever-growing income streams from these stocks for many years to come.
On the date of publication, Bob Ciura did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Bob Ciura has worked at Sure Dividend since 2016. He oversees all content for Sure Dividend and its partner sites. Prior to joining Sure Dividend, Bob was an independent equity analyst. His articles have been published on major financial websites such as The Motley Fool, Seeking Alpha, Business Insider and more. Bob received a bachelor’s degree in Finance from DePaul University and an MBA with a concentration in investments from the University of Notre Dame.