DRIP'ing Your Way to Wealth

David is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Anyone who followed my earlier blog posts, knows dividend reinvestment plans or DRIP investing is my passion. In brief, the beauty of DRIP'ing is the small "buy" and "hold" investor can start with a very small amount of money and through minimal fees and zero capital gains taxes grow it over time it into a large sum . By keeping expenses low and fees to a minimum, long-term investors can make small amounts of money work very hard for them--the true meaning of wealth.

When I first started investing, I unfortunately read a personal finance book of the "great rich quick" variety, but its net takeaway was striking, a person knew they were successful when their money made more money than they could. That being said, if you're looking for quick way to wealth, DRIP's are probably not for you. However, if you're willing to be patient and do the necessary research please continue reading.

So, let's look at a few companies. For the sake of illustration, we'll pick stocks which are both popular with long-term investors and yet simple enough for beginners. We're also going to examine companies which offer attractive DRIP or direct stock purchase plans (DSPP's):

<table> <tbody> <tr> <td> </td> <td>P/E</td> <td>Total Debt to Total Assets</td> <td>Margin</td> </tr> <tr> <td><strong>ExxonMobil </strong><span class="ticker" data-id="206209">(NYSE: <a href="http://caps.fool.com/Ticker/XOM.aspx">XOM</a>)</span></td> <td> 9.4</td> <td> 0.53</td> <td> 10.4%</td> </tr> <tr> <td><strong>Coca-Cola </strong><span class="ticker" data-id="204186">(NYSE: <a href="http://caps.fool.com/Ticker/KO.aspx">KO</a>)</span></td> <td> 19.7</td> <td> 0.61</td> <td> 18.5%</td> </tr> <tr> <td><strong>Foot Locker</strong> <span class="ticker" data-id="203588">(NYSE: <a href="http://caps.fool.com/Ticker/FL.aspx">FL</a>)</span></td> <td> 13.6</td> <td> 0.30</td> <td> 6.3%</td> </tr> </tbody> </table>

In this post, we'll focus on the fundamentals. These include Price / Earnings (P/E), Yield, Total Debt to Total Assets and (profit) margin. By understanding these simple measurements, a beginning (or even experienced) investor can determine the relative value of a security given their specific risk tolerance and investment objectives. I've also selected plans which possess either no or low fees. That being said, the basic advantage for companies offering DRIP's or DSPP's is having access to steady long-term capital from reliable sources and in the process discouraging active trading. Also, another advantage of long-term DRIP investing is the ease in documenting one's yearly tax liability. Whereas an active investor will often need to thoroughly document all long and short-term capital gains, long-term DRIP investors must only declare their dividends and typically a small tax when commissions are paid on their behalf.

Now, let’s examine these (charted) metrics more closely. In terms of ExxonMobil, I like total debt to total assets to be around 0.5, which is to say XOM's has twice the amount of assets on its books as debt. Weighing in at 0.53, XOM is in pretty good shape. Now, let's juxtapose this metric to one of its peers British Petroleum (NYSE: BP). Listing at 0.62, BP's books indicate more risk than XOM. As for P/E, the price of the stock divided by its earnings per share, BP appears slightly cheaper, however P/E's can often be misleading since a grossly depreciated stock price can often make some companies look cheaper than others, what is often referred to as a "value trap." Lastly, profit margin is an approximate measurement of how much of every dollar a company actually keeps in earnings, the higher the margin the better. Therefore, XOM's 10.4% margin as compared to BP's 4.8% paints a more accurate picture of each operator respectfully. Clearly, given these relevant measurements, ExxonMobil is the financially sounder of the two companies and a personal selection of mine.

Next, we'll compare, KO and FL to their peers, to see how each stacks up. In terms of KO, it's total debt to total assets is 0.62, whereas PepsiCo’s (NYSE: PEP) is 0.71, so Coke is the clear winner in this category. As for P/E, KO's is 19.3 and PEP's is 18.9, so a slight advantage goes to Pepsi. Lastly, as to margin, Coke weighs in at 18.5%, whereas PEP lists at roughly 9%, so KO is the clear winner here.

Lastly, let's take a look at FL, total debt to total assets is 0.3, so Foot Locker passes on this indicator. While, Nike weighs in at 0.32, a virtual dead heat. Now, let’s take a look at their respect P/E's, FL lists at a respectable 13.8, while Nike's P/E is 23.9, therefore Nike is relatively expensive compared to FL. As for margins, FL sports at 6.3% margin, to Nike's 8.2%. These factors considered, it's more or less a tossup.

In sum, research DRIP and DSPP's as possible entries for long-term focused value investing. In doing so, you could be pleasantly surprised by the low expense, passive investing approach that pays steady quarterly dividends as well as the pride gained through long-term stock ownership. Lastly, the (above-mentioned) stocks are only meant as examples, as Buffett said, "invest in what you know," read the annual reports, get to know the company's business model, its past successes or areas needing improvement. In the end, investors can achieve both the simplicity and personal fulfillment seldom experienced in the current speculator's market.

Keep searching

These are just a few! There are even more DRIP and DSPP stocks. While, no stock is a sure thing, each one has its advantages and disadvantages and must be carefully weighed prior and during investment. But some dividend reinvestment plans are a lot better quality than others. By examining each opportunity carefully, you'll go a long way toward improving your investing skills and learning how to separate out the most attractive investments, dividend reinvestment and/or direct purchase, or otherwise, from the rest.


dmercer1 is long ExxonMobil. The Motley Fool recommends PepsiCo and The Coca-Cola Company. The Motley Fool owns shares of ExxonMobil and PepsiCo. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

This article is to be used for educational, research and informational purposes only and does not constitute investment advice. There are no guarantees, expressed or implied, of future positive returns in regards to the subject matter contained herein. Understand the risks inherent in investing before making the decision to invest or consult an investment professional for more information. Reasonable due diligence has been performed in regards to the information in this article. However, the author expressly disclaims any liability for accidental omissions of information or errors in fact.

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