The Ultimate DRIP Retirement Portfolio

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For this issue, we thought it would be appropriate to present a portfolio of our favorite DRIP stocks. We've been writing about Direct Investing Plans for the past 30 years, first in the pages of The Moneypaper and, most recently, in these inserts to Utility Forecaster. Over the years, our enthusiasm for DRIP investing has only grown. For larger investors, they remove some of the risk inherent in brokerage accounts. For small investors, DRIPs may be the only efficient way to enter the market. With DRIPs, small investors have the opportunity to establish (and build holdings in) a widely diversified portfolio of great American businesses that will serve them well, whether their goals include retirement, college funding, or other life needs.

Our favorite DRIP companies share many of the same qualities and important metrics, so we started the process for this special portfolio by segregating 239 DRIP stocks that have increased their dividends for at least five straight years into the 10 GICS Sectors. (GICS stands for Global Industry Classification Standard,which is widely used throughout the investment industry.) From each sector, we chose stocks favoring those with No-fee DRIPs that feature attractive combinations of yield, Price/earnings ratio, earnings and dividend growth, and sustainable business models.

For two of the Sectors (Telecommunications and Information Technology), we chose just one company, due to a limited number of candidates and/or a prevalence of fees. Our favorites are Qualcomm Inc. (QCOM) and Verizon Communications (VZ) because of their significant industry presence and future prospects. From all other sectors, we picked our two or three current favorites and explain why below:

From the Consumer Discretionary sector, we chose Genuine Parts (GPC) and Mattel Inc. (MAT). GPC sports a 58-year streak of dividend increases and earnings are expected to grow 9.5% annually over the next five years. MAT has only increased its dividend for five years, but its P/E is under 15 and it yields over 4%.

From the Consumer Staples sector, we've chosen three stocks: Dr Pepper Snapple Group (DPS), General Mills (GIS), and Procter & Gamble (PG). Each has a yield just above 3%, but DPS went public in 2008, whereas PG has raised its dividend for 57 straight years and GIS has paid continuously for more than 100 years (and just increased the payout for the 11th straight year). Although we like Coca-Cola and PepsiCo, DPS sports lower P/E and Payout ratios and no fees.

From the Energy sector, we chose ConocoPhillips (COP) and ExxonMobil (XOM), which both offer no-fee DRIPs. COP yields over 4%, while XOM is the largest company in its industry and is likely to continue its 31-year streak of dividend increases.

Because the Financial sector included the most candidates, we chose three companies: insurer AFLAC Inc. (AFL), mutual fund company Franklin Resources (BEN), and health-care REIT HCP Inc. (HCP). While AFLAC dominates the supplemental insurance market in Japan, where it derives over 70% of its revenues, Franklin enjoys a prominent position in both equity and bond mutual funds and HCP is a major Real Estate Investment Trust in the growing health-care facilities segment.

From the Healthcare sector, we chose Johnson & Johnson (JNJ) and Owens & Minor (OMI), both of which sport dividend yields of just under 3%. JNJ has a 51-year streak of dividend increases and offers a good mixture of medical and consumer products. OMI specializes in operating-room supplies and devices, and enjoys long-term contracts with hospitals nationwide.

To represent the Industrial sector, we've chosen CSX Corp. (CSX) and Lockheed Martin (LMT), providing both a low- and a high-priced stock. CSX is expected to grow earnings by 9.7% annually over the next five years, while LMT yields 3.3%.

From the Materials sector, we've chosen packaging company Bemis (BMS) and specialty chemicals firm RPM International (RPM). BMS offers a 2.75% yield and steady growth, along with a 31-year dividend increase streak. RPM has raised its payout for 40 straight years.

Representing the Utility sector are water company Aqua America (WTR) and electric and gas provider SCANA Corp. (SCG), which sport dividend-increase streaks of 22 and 14 years, respectively.