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SMART INSIGHTS FROM PROFESSIONAL ADVISERS

5 Dividend-Paying Stocks to Give New Grads

A small portfolio of dividend-paying stocks is a gift for new grads that will keep on giving.

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If you're looking for a graduation gift that will make a lasting statement, consider giving a portfolio of high-quality, dividend-paying stocks. This gift can result in a value of hundreds of thousands (or possibly millions) of dollars, over the long term. But yes, you can afford it!

See Also: 9 Best Income Investments Other Than Dividend Stocks

You just need to build the portfolio using companies that offer direct investing through dividend reinvestment plans (DRIPs). Your gift is a single share of the company stock and enrollment in the company DRIP. As a DRIP investor, the gift recipient will be able to accumulate and compound wealth with remarkable results over the long term.

A few years ago when my then 15-year-old grandson asked for athletic shoes for his birthday, I gave him the sneakers, but I also gave him a single share of stock in shoe retailer Foot Locker. I told him that as a shareholder, he was entitled to join the company's DRIP and that if he continued to fund his DRIP account, it would keep him and his future family in shoes—and a lot more. I wanted him to think about saving and investing for his future needs (or wants) by acquiring shares of the companies that make the products he uses and likes.

Unlike gifts of money, which are likely to be spent frivilously, or electronics that will become obsolete, gifts of high-quality dividend paying stocks are likely to appreciate in value—and greatly appreciate over the long-term.

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What's more, the graduate will gain first-hand experience with a logical approach to investing. Many of us might have an emotional barrier that keeps us from investing and the risk of loss that comes along with it. But the truth is, there's no real mystery to investing. Successful investors follow a logical approach that is destined to provide favorable results over the long-term.

With DRIPs, you employ a rationally sound investing regime that takes the mystery out of wealth accumulation. First, you build up a portfolio that represents a variety of industries, and second, you invest even very small amounts (say, $25 at a time) to buy shares or portions of shares. Over time, you will have accumulated shares at a variety of price points—likely having acquired more shares at the lower price points!

It's a great pleasure to see how much your share ownership has grown over the year—especially because the small investment amounts were made with incidental money that might otherwise have been spent on a latte or a bad movie. As the years pass, those shares will compound in a snowball effect that Einstein described as "the eighth wonder of the world."

So, instead of writing a check to commemorate an important graduation, a five-stock portfolio (or larger if you see fit) can cost about what you may want to spend, but the lifetime effect of that gift will be truly amazing.

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To put together this five-stock portfolio of DRIP stocks that I am suggesting, I looked for companies that have a long history of dividend increases. I also kept total return in mind, looking for companies with excellent earning and dividend growth rates, as well as sustainable business models. Since investment amounts are likely to be small to start, I limited my selections to companies that do not charge fees for investing through the plan. I also sought to diversify the companies in terms of industry. Here are the companies I recommend:

International Paper (symbol IP) is the dominant company in the area of paper and packaging, both here and abroad, with almost $23 billion in annual sales and a market capitalization of about $16.5 billion. With a yield of about 4%, it has raised its dividend for six straight years (and its latest increase was 10%).

General Mills (GIS) is a major food processor with products like Big G and Chex cereals, Yoplait and Pillsbury. It has been paying a dividend for 114 years, has never cut it in that time and has increased its payout for the past 12 straight years.

Johnson & Johnson (JNJ) has a market capitalization of about $280 billion, and its business is split between drugs, medical devices and products on one hand and consumer goods like bandages, baby shampoo and topical medicines on the other. The company has increased its dividend for 53 consecutive years.

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ExxonMobil (XOM) is the largest oil company that resulted in the breakup of the old Standard Oil conglomerate with a $333 billion market cap. It routinely logs the largest annual profits of any American company and has increased its dividend for 33 straight years.

Aqua America (WTR) has grown through acquisition from the old Philadelphia Suburban into a network of water and wastewater companies from Maine to Florida and into the Midwest states. WTR benefits from utility commissions that recognize the need for clean water and often acquires municipal water companies by offering improved efficiency. It has increased its for 24 consecutive years.

By investing in the companies in this portfolio (instead of saving in a bank account or a certificate of deposit), any young investor has the opportunity to build wealth by participating in the growth of the economy in the most efficient manner possible.

These companies are just a few of the hundreds whose shares you can purchase directly—and commission-free—through their company-sponsored DRIPs. These companies actually pay the investing fees for you once you've enrolled in their DRIPs—and you can enroll with the purchase of just one share in most cases. For our complete list of companies that offer a no-fee DRIP, click here.

See Also: 7 Good Stocks With Hidden Value

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.