The Return of the DRIP Portfolio

Thirteen years ago, long before the iPhone or Twitter, in a kingdom far, far away, our Foolish colleague Jeff Fischer and former Fool Randy Befumo introduced a DRIP Portfolio on this site.

Their reasons for starting the portfolio were simple:

  1. Most Americans have more credit card debt than they do savings.
  2. Most Americans want to change that situation and start investing.

Sound familiar?

So over the next five and a half years, the Fools slowly added modest sums to a group of five stocks available via dividend reinvestment plans (DRIPs).

When the original Fool DRIP Portfolio closed in 2003, it was up about 1% even though the S&P 500 lost 12% over the same period.

Be the tortoise, not the hare
No, the portfolio didn't generate massive returns over this period, but it wasn't crushed by the dot-com crash, either. Following our own recent spate of volatile markets, I (Todd here) believe most investors would prefer hitting consistent singles rather than knock a few home runs while striking out most of the time.

In fact, had the Fools simply held onto the portfolio through today without any additional management or reinvestment, they'd still be doing quite well:

Company

Return Since Feb. 20, 2003

Mellon Financial*

104.5%

Intel

44.4%

PepsiCo

89.7%

Paychex

26.7%

Johnson & Johnson

39.7%

Average

61%

S&P 500**

49%

*Mellon Financial was acquired by Bank of New York in July 2007; return based on Mellon's last price of $44.44 per share.
**As measured by SPDR Trust ETF.

To us, these results are a testament to the virtues of making steady and deliberate investments in high-quality companies and holding them patiently.

And that's precisely what Bryan and I are setting out to do again, by launching our own DRIP Portfolio backed by our own personal funds for all the world to see, right here on Fool.com.

Here's Bryan to tell you more about it.

Going rogue
Your fearless leaders -- Todd is a homeowner, and I'm a newlywed whose wife has a worse shoe habit than Carrie in Sex in the City -- are far from Scrooge McDuck-wealthy, so we'll build this portfolio slowly. In the coming weeks, our plan is to invest $500 in five wonderful, DRIP-offering companies, for an initial investment of $2,500. As the portfolio ages, we plan on adding to our five holdings only when prudent and when we have some cash to spare.

My Foolish colleague and I are putting our own hard-earned dollars at stake here because we believe in the DRIP philosophy:

  1. Invest in medium to large enduring businesses that have the discipline to consistently return cash to shareholders.
  2. Continuously develop knowledge about your investment over time.
  3. Invest regularly with a long-term mind-set.

Along the way, we'll be sharing our research, commenting on major news and earnings events, posting the portfolio's performance, and engaging in a friendly competition that will likely show that I am much smarter than Todd. Our thinking will be long-term, and we hope to learn from you, too, so chime in with your thoughts, questions, and comments right here on Fool.com.

I hope you join us for the ride, be it for education, amusement, or enrichment.

Oh wait -- Todd just has one more thing to add.

Long live the DRIP!
Next week, Bryan will give you a few names he's looking into for the DRIP Portfolio. To get us started, though, I thought I'd reveal a group of stocks I'm researching for inclusion in the DRIP Portfolio.

Each of these names passed my initial "sniff" test for new ideas: They must have strong competitive advantages, a solid balance sheet, consistent free cash flow generation, and a history of increasing dividend payouts.

Company

Industry

Dividend Yield

Interest Coverage (EBIT / Interest Expense)

Price-to-Free Cash Flow

Caterpillar
(NYSE: CAT  )

Industrial Goods

2.7%

3.7

11.2

J.M. Smucker
(NYSE: SJM  )

Consumer Staples

2.6%

12.9

12.9

Tiffany
(NYSE: TIF  )

Consumer Discretionary

2.6%

8.9

11.3

Microsoft
(Nasdaq: MSFT  )

Technology

2.1%

NM

11.0

Chevron
(NYSE: CVX  )

Energy

4.0%

469.0

21.9

Walgreen
(NYSE: WAG  )

Services

1.9%

36.5

11.5

*Data provided by Capital IQ, as of July 14, 2010. NM = not meaningful.

This is a fairly diverse group of stocks, and that's the point. In our portfolio, we'll make sure that our five companies overlap as little as possible so that we can ensure proper diversification.

We'll keep looking into these companies to see which ones would be the best fit for our portfolio. In the meantime, if you have any questions or comments, fire away in the comments box below.

Be sure to check back next week for a new DRIP Portfolio article.

Want to be the first to know about all the new DRIP Portfolio articles? Sign up to follow The Motley Fool on Twitter.

Fool analysts Todd Wenning and Bryan Hinmon believe a day without sunshine is like night. Todd owns shares of Johnson & Johnson. Microsoft, Intel, and Paychex are Motley Fool Inside Value recommendations. Johnson & Johnson, Paychex, and PepsiCo are Motley Fool Income Investor recommendations. Motley Fool Options has recommended buying calls on Intel and Johnson & Johnson and diagonal call positions on Microsoft and PepsiCo. The Fool owns shares of Intel and has a disclosure policy.


Read/Post Comments (15) | Recommend This Article (34)

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 15, 2010, at 12:51 PM, dfish wrote:

    Note that Walgreen raised its dividend yesterday...for the 35th straight year...by 27%.

  • Report this Comment On July 15, 2010, at 1:33 PM, TMFFischer wrote:

    Congratulations to both of you! It's great to see the DRIP Port brought back to life, and brought to Fools. --Jeff

  • Report this Comment On July 15, 2010, at 1:52 PM, PhulishMortal wrote:

    "Todd is a homeowner, and I'm a newlywed whose wife has a worse shoe habit than Carrie in Sex in the City . . ."

    Sounds like you should include Lowe's and Nike in the DRiP portfolio just for your own protection.

    (Not really.)

    I was going to add a nod on Walgreen, but dfish beat me to it. Costco might be a fit, though.

  • Report this Comment On July 15, 2010, at 2:03 PM, TMF42 wrote:

    Noted...thanks for the feedback PhulishMortal & dfish.

    I wish the shoe habit only applied to Air Jordans. If only Cole Haan was publicly traded...

  • Report this Comment On July 15, 2010, at 3:40 PM, TMFEnochRoot wrote:

    This is great guys. In fact I think we should bring back all of Jeff's old portfolios. Next up, the Harry Jones Port! - Alex

  • Report this Comment On July 15, 2010, at 4:57 PM, TMFCandyMountain wrote:

    Love the idea. Good luck!

  • Report this Comment On July 16, 2010, at 11:01 AM, FutureMonkey wrote:

    Great idea. This has been my investment style since I started managing my own money in 2004. Regular purchase monthly or quarterly and dividend reinvestment is the basic idea behind most 401k. Slow, steady, dollar-cost averaging benefits from volatility without fear, as long as you have a 10-35 year time horizon. This portfolio targets specific stocks, vs investing in a managed plan that siphons off 1-1.5% a year in fees. Plus, you don't have managers trying to time the market, reducing reactionary selling and pursuit of short-term gains; that should reduce costs and tax disadvantage to managed funds. Interesting to see if you can beat some ETF's over the same period.

    I'd like to see the DRIP portfolio get some more international flavored companies. Afterall most of us already make our living in the USA, own our homes in the USA, and have most of our equities and bonds in US companies (so kind of already overexposed to US based companies). Off the top of my head, Novartis, Diageo, but give me some time and I could think of some more.

    Curious to watch how this plays out. Keep us in the loop.

    FM

  • Report this Comment On July 16, 2010, at 11:19 AM, TMF42 wrote:

    FutureMonkey:

    Good point. We will definitely take into consideration international exposure when we piece together the DRIP portfolio. With only five stocks, we will certainly add this to our decision making process. My guess is that we are likely to have US-based companies with lots of international sales (like Yum! Brands, for example) rather than internationally domiciled companies. But the spirit of your point holds true.

    Bryan

    TMF42

  • Report this Comment On July 16, 2010, at 4:22 PM, 300hnh wrote:

    I am also glad to see the Fool put together a DRIP portfolio.

    I am looking to make some lng term changes to my and my wife's IRAs.

    Here are 2 stocks I am considering, what are your views on them:

    Johnson & Johnson (JNJ)

    3M (MMM)

    And what are your's (and other Fools') views or opinions on pipe line companies such as:

    Plains All American Pipeline, L.P. (NYSE:PAA)

    El Paso Pipeline Partners LP (NYSE:EPB)

    Boardwalk Pipeline Partners, LP (NYSE:BWP)

    Atlas Pipeline Partners, L.P. (NYSE:APL)

  • Report this Comment On July 17, 2010, at 6:16 PM, FutureMonkey wrote:

    Bryan and Todd,

    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.

    FM

  • Report this Comment On July 20, 2010, at 10:50 PM, clarkmel wrote:

    In my meager DRIP I've SJM, HAS, & CTL. One rule - I don't own stock in my DRIP that I hold in one of my retirement accounts. However, I've been watching MSFT & CVX; My DRIP may be just the place for them.

    Regards.

  • Report this Comment On August 04, 2010, at 7:32 PM, purcellgal wrote:

    I think it's great you're talking about bringing back the Drip Port. It was a big influence on me when I started Driping.

    I used the the Coke vs. Pepsi debate as an entertaining way to interest my husband in investing. He's still a "Coke man" but Pepsi has been paying me very well during this time.

    I've also been eying Caterpillar for some time.

    I would suggest looking at The Limited (LTD) instead of Tiffany's. They own (among other holdings) Victoria's Secret and Bath and Body Works. They've been a consistent cash (dividend) machine for me during the wild ride in the wake of the tech crash and housing crash. In fact, just a few months ago, I scored 3 reinvested shares in my second special dividend payment.

  • Report this Comment On August 05, 2010, at 4:01 PM, TMF42 wrote:

    purcellgal:

    Thanks for the feedback. I'll make sure Todd takes a look at your comment and considers LTD as a substitute for TIF.

    Keep up the good work!

    Bryan

    TMF42

  • Report this Comment On October 28, 2010, at 2:35 PM, 3DogKnight wrote:

    Sorry for the late question on this article, but I need a little clarification on how to buy additional shares of a particular stock. For instance, I have a couple hundred share of MSFT (currently held at a brokerage), and I want to buy more shares through a DRIP. From Microsoft's web site, I see that American Stock Transfer and Trust manages their share transfer. When looking at the details of the program, it states that there is a Share Sale Fee of $15 and 10 cents per share broker commission.

    http://www.amstock.com/investpower/new_plandet.asp?CoNumber=...

    Is this for every purchase?? If so, this fee can sure eat up my investments.

    Am I missing something?

  • Report this Comment On October 28, 2010, at 3:13 PM, DJSka wrote:

    Which brokerage do you use? With TD Ameritrade, you simply use the message center to send a message to them about which stocks you want to enroll in DRIP. From the next record date onward, your dividends will be reinvested.

    I'm sure the other big brokerages have similar services.

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