How We'll Build Our DRIP Portfolio

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Fellow DRIPers,

Bryan here. Last week, Todd (TMFPhila) and I laid the foundation for the new DRIP Portfolio we'll be personally funding and managing for all to see. Todd even revealed the six companies that he is busy analyzing for inclusion in the portfolio. The purpose of this article is to set the stage for the next phase of our adventure: research and analysis. But first, I need to make a confession.

The walk of shame
I am a DRIP newbie. While I don't mind saying this, I don't like what it implies: In all of my previous investing, I have let fees and commissions eat into my returns. Big time. Just being aware of fees is not enough -- aiming for zero cost is the way to go.

I'm looking forward to learning the ins and outs of DRIP investing from Todd and those Fools who follow along and comment along the way. The beauty of the DRIP is all sorts of investors have access to it. If you've never dabbled in a DRIP, keep me company and we can learn together. The thought of combining thorough and insightful research, regular investing in solid companies, and rock-bottom fees has got my motor racing.

Six more candidates for the DRIP Portfolio
As promised, I've narrowed the universe of companies offering DRIP investing using quantitative screens, Motley Fool CAPS, and any insight I could scrape up from past analysis I've done. Below are the six companies that passed my initial tests. While they may not all be household names, they are similar to Todd's list last week: These companies have strong competitive advantages and healthy balance sheets and generate free cash flow to fund our dividend payments.



Dividend Yield

Interest Coverage (EBIT / Interest Expense)

Price-to-Free Cash Flow

Badger Meter (NYSE: BMI  )










Lubrizol (NYSE: LZ  )





McCormick (NYSE: MKC  )

Consumer Staples




McGraw Hill (NYSE: MHP  )

Consumer Discretionary




Total System Services (NYSE: TSS  )





Source: Capital IQ, a division of Standard & Poor's.

Here's Todd to explain how we will take the DRIP candidate list from 12 down to the final five.

It's like a Battle Royale -- with a fan vote!
In true Foolish form, Bryan and I will square off on each of our portfolio candidates here on Rest assured, it'll be full of literary jabs, valuation suplexes, and financial flying elbows. Don't worry -- you can participate, too, by making your voice heard in the comments box under each article. We want to know what you have to say about our ideas. While we will ultimately fall back on our analysis, we want to incorporate the feedback from our fellow Foolish DRIPers.

When the dust finally settles, we'll have our final five stocks (most likely my stocks). That doesn't necessarily mean we'll rush into all of our positions at once, though -- we only want to buy at the right price.

If one of our Final Five is a screaming buy, we'll announce our intent to buy. And keeping true to the Fool's disclosure policy, we'll wait 10 days before actually putting our money to work. We'll also show you how you can make your own investment via the company's DRIP program.

It'll really be that simple. As Bryan noted in last week's column, we'll keep up with our selected companies' earnings reports and news events and provide other investing lessons in coming months.

Here's Bryan for a final word.

Sector slam
One thing I'll add to Todd's explanation is that we will do our best to create as diversified a portfolio as we can, given our five-stock restriction. We plan on pitting our stocks against one another via sector, the Battle Royale Todd mentioned above.

But it's not just sector that matters. We'll consider our firms' international exposure, the nature of their customers, the cyclicality of their business and how their stocks zig and zag with one another. In the end, after our candidates have been leg-dropped and bounced off the turnbuckles, we should have a reasonably diversified portfolio of healthy businesses that we're interested in for the long term. When the prices are right, we'll apply the Sharp Shooter and corral our shares.

See you next week!

Neither Todd nor Bryan owns shares of any company mentioned. It's probably a safe bet that Jake the Snake Roberts and The Ultimate Warrior would prefer Bryan's portfolio candidates to Todd's. McCormick is a Motley Fool Income Investor recommendation. The aforementioned Foolish disclosure policy is the undisputed heavyweight champion of disclosure policies.

Read/Post Comments (9) | Recommend This Article (28)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 19, 2010, at 4:39 PM, FutureMonkey wrote:

    Bryan and Todd (message is copied over from last week, but didn't get an answer - cuz, well it was sooooo last week).

    Do you have any short term concerns with investing in dividend Income stocks given the uncertainty of reversion of taxation of dividend income next year. Without action I believe the tax relief measure of 2003 sunsets in 2011, returning dividend income to taxation as ordinary income.

    Even if dividends are reinvested in DRIP portfolios there is still tax liability on the cash value of the share gain.

    So, two potential concerns.

    First, Are you concerned that tax at ordinary income will reduce the real return on dividend heavy portfolios held outside of ROTH IRA's.

    Second, Will this make dividends broadly less appealing to investors, exerting downward pressure on the market cap of these companies, thus reducing returns even in a tax-exempt portfolio?

    I apologize if this topic has been done to death over at Income Investor, but I don't suscribe to that newsletter.


  • Report this Comment On July 19, 2010, at 5:04 PM, TMF42 wrote:


    I am sure Todd has his own opinion about this, so I look forward to his response too. However, here are my thoughts on the issue:

    Do I have short-term concerns with investing in dividend income stocks given the uncertainty of the taxation on dividends?

    Yes. In the short-term. But I think that is exactly the point -- it is a short-term concern.

    More importantly, I think:

    1) The benefits of investors developing a DRIP mindset far outweigh the tax issues. DRIP mindset, you ask? DRIP mindset = Investing regularly and consistently without obsessing over price, staying around for compouding over the long-term and finding high quality companies with a total return mindset.

    2) There are some sources of returns that I can control, and some that I can't. I can't control taxes. Even if taxes on dividends increase, they are still likely to be less than short-term cap gains (or equal, in the worst case). But I don't decide. With the DRIP candidates we have chosen, we'll be able to avoid almost all, IF NOT ALL brokerage fees. That is a return-eater that I CAN control. So I'll focus my efforts on doing diligent research and NOT paying fees.

    To address your two concerns:

    1) No, I'm not concerned. Real returns will decline. However, it just puts the onus on investing for total return -- we can't just search for dividends, we have to think about reinvestment opportunities, future growth, end market size, etc.

    2) Yes. Dividend paying stocks will be less appealing to some investors, but I don't think it is a large group. After all - where else are you finding yield these days? Not in treasury bonds, that's for sure.

    Thanks for coming back for article #2. We look forward to more questions and hearing your thoughts.



  • Report this Comment On July 19, 2010, at 8:19 PM, jflurett wrote:

    PNY? WTR?

  • Report this Comment On July 20, 2010, at 12:44 PM, financeguy85 wrote:

    If the two authors are searching for the best DRIP candidates these are certainly confusing candidates. I'm an incoming MBA and I pay daily attention to the markets and I can honestly say I've never heard of 3 of these companies. Where is JNJ? PG? KO? MO? WMT? If you're looking for a group of 5, that's a good list for you.

  • Report this Comment On July 20, 2010, at 8:01 PM, FutureMonkey wrote:


    Thanks for the thorough and thoughtful replies. Don't worry about the delay, if I am patient enough to invest with a 10-15 year horizon, I can wait a few days for a reply.

    I like the response, and has easied my discomfort with short-term downward pressure on market price, afterall isn't that the point of dollar-cost averaging, we'll just get more shares with each dividend payment than we would if price soared. Up - down - sideways. The plan is to accumulate a large position in a solid cash producing business over a long period of time, so that when I retire I'll already have tranitioned into an income portfolio. Sweet.

    As for our list of candidates so far, I need to do some more reading but my blink reflex is to boot McGraw Hill off the island.

  • Report this Comment On July 20, 2010, at 8:27 PM, WallstreetKnight wrote:

    I'm a tad confused, if you purchase with DSP via the cash optional, where do those shares go?

    Do they transfer them to your brokerage service? When you want to sell the shares, the broker takes commission like usual?

  • Report this Comment On July 21, 2010, at 11:28 AM, TMF42 wrote:


    Every DRIP or DSP plan is a little different, so one needs to make sure they understand the specifics of each one they want to participate in.

    Speaking in generalitites though...

    You can ask to hold the physical stock certificates yourself or you can have the Company hold ("custody") the shares for you. Future purchases are generally kept as bookkeeping entries rather than additional physical stock certificates. Companies use a Transfer Agent to do all of this tracking, custody and accounting. So the shares are actually held by the Transfer Agent. You are mailed DRIP account statements, just like you would receive if shares were held in a brokerage account.

    When you decide to sell (again, each plan is different) there will generally be a commission and you probably won't be able to control the price like you would in a brokerage account. No limit orders here. However, we aren't bothered by this because we plan on holding these shares for a while and not trade in and out.

    This link might help:

  • Report this Comment On July 22, 2010, at 10:05 AM, FutureMonkey wrote:

    Just noticed WM (Waste Management) has a DRIP investment option.

    Interesting company with stable cash flow, good moat, in duopoly with Republic Services (Buffet stock), throwing off 3.5% dividend while handily beating SP500 over last 10 years. Doubled return over period of JNJ and near PG.

    Seems like a slow and steady wins the race kind of company that is likely to be present and profitable for decades to come (unless you see an alternative technology suddenly reducing need for trash pickup and landfills).

  • Report this Comment On August 12, 2010, at 12:50 AM, tbyrd58 wrote:

    I started my first DRIP investment in Dec 2008 when I became tired of looking at 1.5% bank returns on savings. Inventing in something I understood, I went with Duke Energy. They have a great plan for a first time investor run by their one shareholder relations depart they have NO fees other than $.05 per share for selling.

    The dividend yield was 6.3% at the time. The dividend has increased twice since then and the price has risen 16.7%. This has caused the dividend yield to drop to 5.8%. But its great compared to what the banks are offering and I feel just as safe.

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