Dividend Stocks

3 DRIP Stocks for Dividend Growth Investors

Dividend reinvestment plans, or DRIPs, can be effective ways to accumulate shares of high-quality companies for those with limited capital to invest. Often times, investors can buy fractional shares of companies for as little as $25 a transaction.

Many companies offer ways to acquire shares of their business without a fee, allowing the investor to use all of their capital to build a portfolio. This can help the investor create wealth over time even if the amount invested each month is smaller.

There are also many DRIPs available for companies with multiple decades of dividend growth.

Three of our favorite no-fee DRIP stocks include:

  • O. Smith (NYSE:AOS)
  • Hormel Foods (NYSE:HRL)
  • S&P Global (NYSE:SPGI)

DRIP Stocks: A.O. Smith (AOS)

Source: Shutterstock

The first DRIP stocks name to consider is A.O. Smith, which develops energy-efficient products and solutions. The company is valued at $10.3 billion and generates annual revenue of $3.5 billion.

A.O. Smith is a leading manufacturer of boilers, water treatment products and water heaters for residential and commercial use. The company also produces air purification products.

There are three key markets for A.O. Smith going forward, the U.S., China, and India. The company’s water heater business already has an entrenched position in the U.S., with 40% commercial and 30% residential market share.

A robust housing market in the U.S. coupled with low unemployment encourages consumer investment in household upgrades, such as new water heaters. The company’s top spot among manufactures of water heaters means that A.O. Smith’s products are trusted by the market, which allows for pricing power.

China and India are two important sources of future growth as well. Both nations have very large populations where the middle class has just begun to emerge as these economies have grown at faster rates. Household upgrades, such as water heaters, have only recently become an option for many of these consumers. As their financial situations improve, there should be higher demand for products that can increase the quality of life. This puts A.O. Smith in an advantageous position going forward due to its strong business model.

The strength of the domestic business and the possible future growth from international markets should help A.O. Smith to continue to grow its dividend, something the company has done for 28 consecutive years. A.O Smith is one of less than 70 companies with the title of Dividend Aristocrat.

Investors should see dividends totaling $1.12 this year. With our expectation for $3.45 of earnings-per-share in 2022, A.O. Smith has a forecasted payout ratio of just 33%. This is just marginally higher than the average payout ratio of 30% since 2012. Shares of A.O. Smith yield 1.7%, slightly higher than the average yield of 1.4%.

Hormel Foods (HRL)

Hormel Foods Logo shown on a laptop screen behind a phone screen also showing the logo. HRL stock.

Source: viewimage / Shutterstock

Next on our list of DRIP stocks is Hormel, a top name in the of consumer-packaged goods industry. The company has a market capitalization of $29 billion and generated revenue of almost $12 billion in 2021.

Hormel was founded more than 130 years ago. Since then, the company transformed into a leader in its industry. The company has operations in 80 countries around the world, giving it a reach that many competitors cannot replicate.

The company is blessed with a product portfolio that is incredibly well known and trusted by consumers. Some of the company’s products include Planters, Skippy, Applegate and SPAM. Products are separated into four separate categories, including center store foods, international, Jennie-O turkey, and refrigerated foods. Hormel also sell products to the food service industry, allowing it to diversify away from the grocery or convenience store.

The company isn’t over reliant on any one product or area either. Hormel’s portfolio is so deep that the company holds the first or second spot in terms of market share in 40 different product categories.

Hormel has also taken steps to augment its core business through the use of acquisitions. The company purchased the Planters snack nuts line for nearly $3.4 billion from Kraft-Heinz (NASDAQ:KHC) last year. Doing so gained entrance to an area where Hormel had limited exposure. The acquisition also immediately added another product to the portfolio that had significant market share and brand recognition.

This level of market share control throughout the portfolio enabled Hormel to grow its dividend for 56 consecutive years. Hormel is one of just 40 Dividend Kings, which are those companies with at least five decades of dividend growth.

Hormel should pay out dividends of $1.04 per share in 2022. We project that the company will earn $1.95 per share this year, implying a payout ratio of 53%. This is isn’t too far off the 10-year average payout ratio of 45%. Hormel offers a yield of 1.9%.

DRIP Stocks: S&P Global (SPGI)

dividend stocks: A calculator projecting the word "DIVIDEND" rests on a pile of gold and silver coins.

Source: Shutterstock

Our final DRIP stocks entry is S&P Global, a leading provider of financial services and business information. The $137 billion company has annual revenue of $8.3 billion.

S&P Global was formed following the 1917 merger of McGraw Publishing and Hill Publishing. Years later, the company created the S&P 500 index, largely viewed as the most important index of large-cap U.S.-based stocks.

The company offers a broad range of financial services, which includes analytics, benchmarks, credit ratings and data. S&P Global provides vital information for investors that help to analyze and understand potential investments. The company is the market standard in several of these areas, which drives business as investors of all sorts seek out the company’s products.

S&P Global happens to operate in a industry that is highly concentrated. There are just three major credit ratings agencies that together control more than 90% of the global financial debt rating business. Clients want the best research available allowing for pricing power for S&P Global due to its industry leading services. Trust is a crucial element when it comes to finances and customers have long trusted the company’s products and services.

S&P Global’s business has been so successful for long periods of time that the company has raised its dividend for 49 years in a row. This places the company one year away from achieving Dividend King status.

Shareholders should see $3.32 of dividends-per-share this year. With expected earnings-per-share of $14.60 for 2022, S&P Global’s payout ratio is forecasted to be just 21%. This is below the average payout ratio of 26% for the last decade and would be the company’s lowest payout ratio for the period. The stock offers a yield of 0.9%.

Final Thoughts

Investors with limited capital shouldn’t be discouraged from building a retirement portfolio. They can use DRIPs to invest in high-quality stocks that have demonstrated long-term commitment to growing dividends, often for no fees.

A.O. Smith, Hormel and S&P Global are three examples of stocks with long track records of dividend growth that provide ways for investors to build positions in their respective businesses. Each company has multiple decades of dividend growth and very reasonable payout ratios, making it likely that each name will continue to grow its dividend for years to come.

Using DRIPs in these names could create a portfolio of top-notch dividend paying stocks.

On the date of publication, Bob Ciura did not have (either directly or indirectly) positions in any of the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Bob Ciura has worked at Sure Dividend since 2016. He oversees all content for Sure Dividend and its partner sites. Prior to joining Sure Dividend, Bob was an independent equity analyst. His articles have been published on major financial websites such as The Motley Fool, Seeking Alpha, Business Insider and more. Bob received a bachelor’s degree in Finance from DePaul University and an MBA with a concentration in investments from the University of Notre Dame.

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