Surrounded by DRIPs? It Just Might Be the Best Thing for You

Just Might Be the Best Thing for YouThere are plenty of stocks out there that have proven to be worth buying when they’re down. These are established businesses that are very good at what they do; the only problem being that they typically aren’t down on the stock market for very long. Over the coming weeks, I want to highlight some of these companies. They are large-cap dividend paying stocks that I feel long-term stock market investors can build a position in over time.

My first highlighted company may come as no surprise. I continue to look at PepsiCo, Inc.’s (NYSE/PEP) long-term track record on the stock market with amazement. This stock has been ticking higher virtually unabated since 1984. On a split-adjusted basis, the stock was trading around $2.00 a share at the beginning of 1984; now it’s at $70.00. That’s a 35-bagger, and that doesn’t include all those increasing dividends. With dividends reinvested in shares, the investment return is substantially larger. PepsiCo’s recent stock chart is below:

PEP Pepsico, Inc stock market chart

Chart courtesy of www.StockCharts.com.

And the returns are still very impressive over recent history. In 1995, the stock was trading at $20.00 a share, in 2000 it was $35.00, in 2005 it was $50.00, and in 2010 it was at $60.00. Every single time, save one, the share has recovered on the stock market after a major pullback. Like many companies, PepsiCo’s stock hasn’t quite got back up to its all-time high, set in November of 2007 around $77.00 a share.

PepsiCo has a great dividend reinvestment plan (DRIP). You can reinvest all of your quarterly dividends, or just a portion of them, back into company shares. You can even set up monthly direct-buy contributions.

On the stock market, attractive buying opportunities for this particular company have come around often enough. Last September and October was a good new entry point. The shares pulled back to the $60.00-per-share range. They’re about $10.00 higher today.

I can’t reiterate enough the importance of the role of dividends in total stock market returns. The compounding nature of dividend reinvestment is how you create wealth from an otherwise mature business. And the reason why you want a mature business is because it is a whole lot safer than a new one. Of course, a lot of stock market investors require the income from dividend paying stocks, and the key here is to own a company that has a good track record of increasing quarterly dividend payments over time. That’s how you beat the inflation rate.

The next big pullback in the stock market should be a good buying opportunity for those managing a portfolio of equities. The U.S. economy is not going to grow like it used to, and it’s very likely to experience another recession within the next two years. While unemployment is staying stubbornly high (like in the eurozone), there is recovery in the housing market and some corporations are in the best financial shape they’ve ever been.

A new business cycle is a long way off, but it will happen. The stock market, as measured by the major stock indices, is becoming less relevant to your pocketbook in the age of austerity. (See “Dividend Yields Going up—the Outlook For Stocks, Not So Good.”) From my perspective, PepsiCo is one of those DRIP stocks that is worth considering when it’s down. A great track record offers nothing for the future, but it certainly makes a prospective shareholder feel a whole lot better.