A dividend reinvestment plan, or DRIP, can be an excellent way to help your returns compound over time. It allows you to have your dividends automatically used to buy additional shares (even fractional shares) of the stocks you own, and it does so without charging you a commission.
It's important to note that while a DRIP is a valuable tool to use with all of your dividend stocks, there are some stocks that benefit more than others from these plans. We asked three of our analysts to tell us some of their favorite stocks that belong in your dividend reinvestment plans, and here's what they had to say.
Matt Frankel: One stock that works great in a dividend reinvestment plan is Realty Income (NYSE:O), which not only pays a nice 4.4% dividend yield and has a great track record of growth and returns, but it also pays out on a monthly basis. The net result is that your investment compounds at a faster rate than if the company paid less in dividends or did so less frequently.
Realty Income owns desirable commercial property that is rents to retail tenants, many of whom are major national companies. The tenants pay rent, as well as the properties' variable costs like taxes, insurance, and maintenance. All the company has to do is collect a check. And because real estate tends to increase in value over time, the company benefits from the appreciation of its properties as well as the income they generate.
As far as dividend reinvestment is concerned, a monthly dividend is significantly more valuable than a quarterly one because it allows your money to compound more frequently, which produces more growth over the long run. Plus, once you actually need the income, a monthly dividend offers convenience.
Realty Income has increased its dividend for 70 consecutive quarters and has averaged a total annual return of 17.1% over the past 20 years. This kind of performance can create serious wealth when compounded in a DRIP over a long period of time.
Dan Caplinger: Most people don't think of Apple (NASDAQ:AAPL) as being a dividend stock. Admittedly, the company didn't pay any dividends for a long span between 1995 and 2012. But over the past three years, Apple has started making a respectable quarterly payout, and it's only the stock's exceptionally strong share-price performance since 2012 that makes the tech giant's 1.5% dividend yield look relatively puny.
To put Apple's dividend in perspective, the company paid out $11.1 billion in dividends last year, putting it second only to ExxonMobil in terms of cash payments to shareholders. Moreover, Apple's dividend obligations fell because of its extensive share buybacks, which reduced the number of shares outstanding and therefore the total dividends payable.
Apple doesn't come close to matching the dividend yields of many of its tech peers, as some of the older tech names have seen their businesses mature and generate much more in cash flow than the companies can profitably reinvest in their internal operations. Apple, on the other hand, has plenty of capacity for research and development to boost its profitability going forward. For those seeking a smart combination of dividend income and growth potential, it's hard to beat Apple, even after its huge share-price increase in recent years.
Jason Hall: One stock that absolutely belongs in your dividend reinvestment portfolio is American Express Company (NYSE:AXP). It yields only 1.3% based on today's stock price, but the real value is in the company's long history of dividend growth. Let me show you how powerful that growth can be if you hold the stock for long periods of time:
Over the 27 years this chart illustrates, American Express stock alone has underperformed the S&P 500. But when you factor dividend payments in, as is reflected in the Total Return number, you get market-crushing returns, even through three big recessions.
Looking ahead, it may seem AmEx's best days are behind it, but that's potentially far from the truth. Over the next several decades, about 1 billion people will join the global middle class. Furthermore, while the vast majority of global transactions are still cash, mobile technology is changing that dynamic. With one of the strongest brands and payment networks in the world, millions of new affluent consumers could be carrying an AmEx card in their wallets -- whether real or virtual. That should mean consistent dividend growth for years to come.
Dan Caplinger owns shares of Apple. Jason Hall owns shares of American Express and Apple. Matthew Frankel owns shares of American Express and Realty Income.. The Motley Fool recommends American Express and Apple. The Motley Fool owns shares of Apple and ExxonMobil. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.