Where the stock market will be tomorrow, next week, or even next year is anyone's guess. But considering the enormous size of the global financial markets and all of their moving parts -- including the new ones coming out of Washington -- such prognostication is about as futile as trying to boil the ocean.
It is apparent, however, that there are some darn fine American companies trading at valuations we haven't seen in a long time. If you've already paid off high-interest credit cards, and you've put away a few months' worth of expenses in a federally insured savings account, now is the time to put money that you won't need for three to five years to work in U.S. stocks.
This isn't to say you should invest all of your cash right now, or that the market couldn't fall further in the short run. A good strategy in today's market is to invest slowly and methodically in undervalued companies, without getting dragged down by commissions. Fortunately, there's a way to do just that -- through a dividend reinvestment plan, or Drip.
In a Drip arrangement, companies allow you to directly buy their shares with as little as $50 to $100 each month, provided you've made a small initial purchase. Thereafter, you can continue to buy as little or as much as you want -- often without having to pay brokerage commissions. Plus, if the company pays a dividend, the plan can automatically reinvest that payout for even more shares, most of the time free of charge.
For patient, long-term investors who care little for daily market movements and want to invest new money bit by bit, it doesn't get much better than a Drip.
What's the catch?
Despite all of the great benefits of Drips, there are a few drawbacks.
While the majority of Drips allow you to make your initial stock purchase through the plan itself (typically called a "direct purchase plan" or DPP), others may require you to first purchase the shares through a broker, and then have the shares' registration transferred into your name. This can get especially confusing if you're doing so with more than one stock at a time. Each Drip has different terms and conditions, so please be sure to read them all before investing.
Second, because you're not paying a broker to administer your investment records, the onus of record-keeping rests on you. Each successive investment and dividend reinvestment in a Drip affects your cost basis, so if you don't like math or aren't very organized, a Drip may not be for you. What's more, if you have more than one Drip, you could face multiple statements and tax forms -- but that's nothing a binder and a three-hole punch can't fix.
Now, the stock ideas I promised
Not all publicly traded companies offer Drips -- including non-dividend payers like Google (Nasdaq: GOOG) and Apple (Nasdaq: AAPL) -- but according to DripInvestor.com, more than 1,100 do offer some form of the plan -- so we're not talking about a small opportunity here. In fact, each of the seven great American stocks I mentioned in the title can be directly purchased through a company-sponsored Drip.
These seven stocks not only trade for less than 15 times trailing earnings, but also post a return on capital of more than 10% and yields greater than 2%.
| Company | Price-to-Earnings (TTM) | Return on Equity | Dividend Yield |
|---|---|---|---|
| Altria (NYSE: MO) | 11.6 | 86.4% | 7.3% |
| United Technologies (NYSE: UTX) | 12.7 | 20.9% | 2.8% |
| Emerson Electric (NYS: EMR) | 13.9 | 20.7% | 3.8% |
| Boeing (NYSE: BA) | 14.0 | 50.4% | 3.9% |
| Kellogg (NYSE: K) | 15.0 | 53.5% | 3.2% |
| FPL Group | 12.1 | 16.8% | 3.3% |
| H.J. Heinz | 13.1 | 59.4% | 4.4% |
Source: DripInvestor.com and Capital IQ, a division of Standard & Poor's. TTM = trailing 12 months.
The volatile market could trend lower in the short term, so I wouldn't recommend buying any of these stocks all at once. But at today's valuations, they're definitely worth considering for an initial investment through a Drip. Once you're enrolled in the plan, you can then add small amounts each month if you decide to, without making a large bet on the current prices.
Foolish bottom line
Despite the recent rally, the market remains well off its 2008 highs, which has left many American companies trading at valuations unseen in years -- and in some cases, more than a decade. Yet the severity of the market's volatility has left investors understandably gun-shy. Fortunately, dividend reinvestment plans can provide you with a great opportunity to slowly and methodically accumulate shares of solid, undervalued companies at little or no cost.
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