7 Great American Stocks on Sale

Where the stock market will be tomorrow, next week, or even next year is anyone's guess. And 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 still 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 again 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 Adobe Systems (Nasdaq: ADBE  ) and NVIDIA (Nasdaq: NVDA  ) -- 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 plan.

These seven stocks not only trade for less than 16 times next year's earnings (the S&P average is near 16), but also post returns on equity of more than 10% and yields greater than 2%.

Company

Forward P/E

Return on Equity

Dividend Yield

Merck

11.0

37.9%

4.1%

Bristol-Myers-Squibb (NYSE: BMY  )

12.2

27.6%

5%

Chevron (NYSE: CVX  )

10.4

13.9%

3.5%

Reynolds American (NYSE: RAI  )

11.2

14.4%

6.7%

Southern (NYSE: SO  )

13.5

11.4%

5.2%

Wal-Mart

14.3

20.3%

2%

Philip Morris International (NYSE: PM  )

13.0

69.7%

4.8%

Sources: DripInvestor.com and Capital IQ, a division of Standard & Poor's.

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 not seen 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.

If you'd like more stock ideas to consider for a Drip, consider a 30-day free trial of our Motley Fool Income Investor service, where advisor James Early looks for the best dividend stocks on the market. Not all of its picks have Drip options, but five of the six "buy first" stocks can be purchased with a Drip. To check out those picks, start your free trial by clicking here. There's no obligation to subscribe.

Already a member of Income Investor? Log in here.

This article was originally published March 13, 2009. It has been updated.

Fool analyst Todd Wenning would like to take this moment to salute America's law enforcement officers. He owns shares of Philip Morris International. Adobe Systems and NVIDIA are Motley Fool Stock Advisor picks. Wal-Mart is an Inside Value recommendation. Southern is an Income Investor pick. Philip Morris International is a Global Gains selection. The Fool's disclosure policy is bad to the bone.


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