Best DRIP Stocks for 2021

A dividend reinvestment plan (“DRIP”) is a way to accumulate additional shares of stock in a company by automatically reinvesting your periodic dividends into more shares. But not all dividend stocks are worthy of owning, much less buying additional shares with your dividend payments. We want to explore some of the best DRIP stocks for 2021 and beyond.

Think of these stocks as some of the best DRIP stocks right now and use them as a starting point for your research.

Finding the Right DRIP Investing Company

Historically if you wanted to enroll in a dividend reinvestment plan you had to open a DRIP program account with each company you were interested in. Companies offer these DRIP programs as a way of getting smaller investors interested in buying their stock.

More recently all major brokerage houses allow you to reinvest your dividends into more shares of a business you invested in. This is done automatically at little to no costs to the investor.

A dividend reinvestment plan allows you to dollar cost average the price at which you buy the stock of a company because you are making many small purchases of additional stock with the dividends you receive.

The best DRIP stocks from the stock market today are very popular with dividend investors. They offer some attributes of a growth stock in that their earnings grow most years. But the dividend yields are also attractive. When you combine these favorable attributes with annual dividend increases, you get a total return that has a good chance of beating the returns generated by the S&P 500 index.

Characteristics of a Good DRIP Stock

Here are the characteristics to look for in a good business for your dividend reinvestment plan:

The business should be a high-quality company whose products people use every day. If the business is too hard to understand, stay away.
The business should have a long-term history of paying a dividend for at least the last ten years, and preferably have a history of increasing those dividends annually. Start by looking at published lists of dividend aristocrats (businesses with dividends paid for at least 25 consecutive years).
Look closely at how much debt a company has because this could impact its ability to pay a dividend. This is particularly true if some of that debt is coming due soon. Be sure to look at how the business is financed between debt and equity to help assure the dividend payments are relatively safe.
The business should have a dividend payout ratio of no more than the 50% to 60% range. The dividend payout ratio is calculated by dividing the annual dividend paid per share by the earnings per share. If the payout ratio gets too much above 60% it may indicate that the business is paying too high a dividend for the amount of earnings being generated. This is a yellow flag that the dividend could be reduced or stopped in the future.
Make sure the business is operating in an industry that is thriving. For instance, many dividend investors are attracted to the high dividends paid by the tobacco industry. But we see that industry as slowly dying, held up only by constant price increases that are not sustainable.

Here are the three best DRIP stocks to own for 2021. These stocks are also some of the best DRIP stocks to own for the long term. If you buy them now you should be well rewarded in 2021, but also for many years after. Be prepared to own them for at least three to five years.

The Best DRIP Stocks for 2021

Lockheed Martin (LMT)

Lockheed Martin Corporation is an American aerospace, defense, arms, security, and advanced technologies company, with revenues of approximately $60 billion. It was formed by the merger of Lockheed Corporation with Martin Marietta in March 1995.

Its current dividend yield is just under 3% and it has a very safe payout ratio of just 40%. Lockheed Martin takes its dividend commitment to its shareholders seriously, having increased it annually for the last 18 years.

Much of Lockheed Martin’s products are sold to the federal government and its allies. This is an industry where the products may change over time, but the demand will always be there.

Lockheed Martin’s stock price has pulled back approximately 20% from its high on worries about what a Biden administration might do to the defense budget. Ignore the noise of the current news cycle and consider buying some shares for your dividend reinvestment plan.

Home Depot (HD)

Founded in 1978, the Home Depot (HD) is the leading North American home improvement retailer, with over 2,200 stores. It sells to both the do-it-yourself and professional contractor markets.

Home Depot is hugely successful with over $120 billion in annual revenue. They have a dividend yield of approximately 2.4%. That dividend is very safe with a payout ratio of approximately 50%.

Home Depot is very committed to its shareholders, having increased its dividend annually for the last ten years.

We don’t see the home improvement craze slowing down any time in the years ahead, so Home Depot should be a winner for your portfolio for many years to come.

Microsoft (MSFT)

There are so many ways to win with Microsoft.

They started out as a software company for personal computers, but have expanded significantly into brands like LinkedIn, Xbox and most recently Azure.

Despite a market capitalization of $1.6 trillion, Microsoft is still growing revenue and profitability at double digit rates.

They are rewarding shareholders with a dividend yield currently at 1%, that is being increased annually by 10%. With a payout ratio of approximately 25% and more than $100 billion of cash on the balance sheet, the dividend is quite safe and is likely to keep growing.

Summary

DRIP investing is a proven way to successfully accumulate shares of a business over time. But be sure to pick the right stocks.

Use the criteria outlined above and our three suggestions to start your DRIP portfolio that will reward you in 2021 and over the long run.