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SMART INSIGHTS FROM PROFESSIONAL ADVISERS

Say Congratulations with a Gift That Keeps on GROWING: 5 Great DRIPs to Buy

Dividend reinvestment plans are the ultimate gifts. It's not inconceivable that today's modest gift could grow to $1 million when your new graduate or favorite newlywed retires.

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Spring is in the air and summer is around the corner. Both seasons mark significant milestones for many younger people. There are graduations and weddings — events that mark important accomplishments and lifelong commitments. These are occasions that deserve to be commemorated with significant gifts.

SEE ALSO: 7 Things You Need to Know About Mutual Funds

For the past several years the editors at Moneypaper have offered an alternative to the traditional cash gift — where your gift is distinguished from the next only by the dollar amount. That gift is a five-stock portfolio held in dividend reinvestment plans (DRIPs).

Your total investment cost to set up such a gift portfolio is somewhere between $400 and $500 (depending on the current share prices of the stocks). In addition to the financial benefit, which has the potential to compound to substantial wealth over the long-term, this gift will provide the recipient a first-hand experience with a logical approach to building wealth by investing in stocks.

By “saving” in the stock of the companies in this DRIPs portfolio, your young investor has the opportunity to build wealth by participating in the growth of the economy with cash investments of as little as $25 at a time. These small investments are likely to compound into real wealth over the long-term.

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An Astounding Nest Egg at Retirement

Let’s assume that the graduate or the newlywed (or you on their behalf), invests $1,500 a year for the next five years — that’s $125 a month spread evenly among the five high-quality, dividend-paying companies in the portfolio ($25 in each company every month). Let’s also say that no further investments are EVER going to be made into those accounts. Based on the historical returns of the stock market over long periods of time, the results would be astounding.

What would the total $7,500 (invested over five years) turn into? The answer will surprise you…

Assuming a 7% return compounded annually, you’ll have $8,801 at the end of your first five years. Leave that alone and make no more contributions and your investment would grow to $259,251 in 50 years assuming a 7% annual average return compounded.

Now, let’s use a more optimistic assumption: that is that the average annualized growth is 10%, which approximates the long-term return achieved by the market as a whole as calculated by the Ibbotson organization.

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Assuming a 10% return compounded annually, you’ll have $9,359 at the end of your first five years. Leave that alone and make no more contributions and your investment would grow to $1,098,661 in 50 years.

Now that's a substantial gift!

5 Companies for Your Consideration

Every year the editors of Moneypaper pick five companies worthy of your consideration for such a gift. To make our list, these companies have consistently paid dividends for 10+ years, offer a company-sponsored DRIP where your dividends can be automatically reinvested and shares can be purchased directly without paying fees or commissions. With such a portfolio, your long-term results are likely to exceed the results achieved by the market as a whole.

Hormel (ticker symbol HRL) is a food service company that produces a wide range of meat products, including pepperoni, Spam and Jennie-O turkey, as well as Skippy peanut butter.

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MDU Resources (MDU) is a diversified natural resource company with business operations in energy delivery and construction.

Polaris Industries (PII) designs, engineers and manufactures off-road vehicles including all-terrain vehicles (ATV) and side-by-side vehicles for recreational and utility use, snowmobiles, motorcycles and global adjacent markets vehicles, together with the related parts, garments and accessories.

3M Company (MMM) is a diversified technology company with brands including household names like Post-it Notes and Scotch Tape.

Abbott Laboratories (ABT) is a health care company engaged in the discovery, development, manufacture and sale of a diversified line of health care products, including Similac baby formula and Glucerna nutrition drinks.

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The best way to set up this portfolio is to purchase the stock directly by enrolling in the company’s DRIP. That way you won’t pay commissions and your dividends will be automatically reinvested to compound over the years. Enrollment in these companies is available through the Temper Enrollment Service with the purchase of a single share of company stock. For a full list of no-fee DRIPs, click here.

See Also: 3 Warning Signs It is Time to Sell a Stock

Ms. Vita Nelson is is the Editor and Publisher of Moneypaper's Guide to Direct Investment Plans, Chairman of the Board of Temper of the Times Investor Service, Inc. (a DRIP enrollment service), and co-manager of the MP 63 Fund (DRIPX).

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This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.