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Best DRIPs for a Bear Market

Three low-cost dividend reinvestment plans give investors an easy way to dip their toes into a choppy market.

By Thomas M. Anderson

March 21, 2008

It's easy to rain on the parade of dividend reinvestment plans. Many of these plans, which let you buy shares directly from the company and automatically reinvest dividends, have layered on fees even as discount brokers have slashed commissions over the past decade.

Yet dozens of DRIPs offer an affordable path to stock ownership. Now is a particularly good time to check out these low-cost plans. They allow investors to efficiently sock away small amounts of money in a stock at regular intervals. This is known as dollar-cost averaging, a strategy designed to take the emotion out of investing. By allowing you to buy shares at lower prices, averaging can help smooth out the bumps of a bear market and can position your portfolio for the next bull market.

Such fee-friendly plans have three main characteristics. First, they allow investors to buy the initial share directly from the company. Many DRIPs require that investors be shareholders before they can participate in the plan.

Second, the best DRIPs don't charge any fees when you buy shares. Fees in some pricey DRIPs can be as high as $5 per share per purchase.

Third, low-cost plans don't charge for reinvesting dividends. By contrast, some DRIPs levy reinvestment fees, usually 5% to 10% of the amount being reinvested up to $5.

The DRIP Investor newsletter recommends ten fee-friendly plans for stocks with solid long-term prospects. Each DRIP charges no fees for optional cash investments and reinvested dividends. You can buy the first share directly from the company, and each plan has a low minimum initial investment. "If people are really worried about a bear market, they can lean toward plans of defensive stocks," says Charles Carlson, who has edited the newsletter since 1992.

Among Carlson's picks, three companies that offer fee-friendly DRIPs stand out: Emerson Electric (symbol EMR), Lockheed Martin (LMT) and PepsiCo (PEP). These aren't high-yielding stocks, but all three of the companies have a demonstrated record of being able to generate earnings growth even when the economy sags.

Emerson Electric is a consistent performer. It makes a range of electrical equipment used by chemical, energy and telecommunications companies. Based in St. Louis, Emerson has increased dividends every year since 1956.

Overseas sales, particular to emerging markets, have helped the Emerson deliver steady revenue and profits. Sales to Asia grew 15% in 2007. All told, 54% of Emerson's 2007 sales of $23 billion came from outside the U.S., with a third coming from emerging markets.

The stock, which closed at $49.07 on March 20 and yields 2.4%, generated a total return of 17% over the past year (over the same period, Standard & Poor's 500-stock index lost 6%). It trades at 16 times the $3.02 per share that analysts expect Emerson to earn for the fiscal year that ends next September.

Emerson's DRIP has a $250 minimum investment and a $15 enrollment fee. For more information, see its see its direct investment program.

Lockheed Martin, the world's largest military contractor, has plenty of work to keep it busy, with a $76 billion backlog of business. Demand for Lockheed's electronics and data services remains strong as the U.S. government upgrades its communications systems. The U.S. Air Force will come calling at least until 201l to replace its aging fleet of aircraft with F-22 Raptor fighters made by the Bethesda, Md., company.

The stock, which closed at $100.05 on March 20, returned 3% over the past year. It trades at 14 times the $7.36 per share that analysts expect the company to earn in 2008 and yields 1.7%.

Lockheed Martin's DRIP is top notch. The direct-purchase plan has a $250 minimum and no enrollment fees or purchase fees. Find out more about its program.

PepsiCo's powerful brands are just the antidote to rising prices and a slowdown in U.S. consumer spending. With well-known products such as Gatorade, Doritos and Mountain Dew, the Purchase, N.Y.-based company can pass along higher costs to consumers by raising its prices. Moreover, its overseas businesses posted double-digit growth in sales and profits in 2007.

The shares, which closed at $71.19 on March 20, returned 15% over the past year. The stock yields 2.1%. PepsiCo's DRIP has a $10 account set-up fee and a $250 minimum investment. See Pepsico's BuyDIRECT Plan for more information.

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