Here’s 2 DRIP Stocks To Compound Your Long-Term Gains

Key Points

• Dividend reinvestment plans (DRIPs) are most suitable for investors that want capital appreciation over income.
• DRIPs reinvest dividends by buying more stock on the payout date at current prices.
• Investors are free to switch back to cash dividend payouts if the DRIP is too slow, so DRIPs are for long-term investments to give it time to compound.

Stocks that pay out a quarterly dividend usually pay in cash. Income investors seek out stable dividend stocks to collect dividend payments. Some stocks offer dividend reinvestment programs (DRIPs) which allow reinvesting the cash dividend into more stock with no fees or commissions. In this case, the dividend payment would be used to purchase more stock on the payout date. They are often fractional share purchases since dividends are only a fraction of a stock's price. DRIP stocks are not suitable for investors seeking income.

They are suitable for long-term investors seeking capital appreciation. DRIP stocks allow for dollar cost averaging and compounding over the long-term enabling investors to grow their positions and benefit from compounding the returns to generate additional returns. DRIP stocks are a “set it and forget it” investment.

However, investors can always opt to take the cash dividend if inclined. Selecting stable stocks for the long term that fits your risk profile is crucial. Here are two DRIP stocks that have stood the test of time and should continue to grow over the long term.

Kellogg Company NYSE: K

This consumer staples stock is the maker of popular cereal brands and convenience foods households consume worldwide. Founded in 1906, the company has grown its distribution to over 180 countries, with manufacturing plants in 21 countries. Its cereal brand portfolio includes Apple Jacks, Corn Flakes, Corn Pops, Froot Loops, Frosted Flakes, Raisin Bran, Rice Crispies, and Special K. Its snacks include household brands Pop-Tarts, Pringles, CHEEZ-IT, Club and Town House crackers.

As a consumer staples stock, it remains an excellent defensive stock during economic contractions and moves with the indexes during bull markets.

The company is driving growth through global expansion into emerging markets. The company plans to split into three public companies: the North American cereal company, global snacking, and its plant-based business by the end of 2023. Shareholders should receive a piece of each spin-off as a special dividend to further maximize shareholder value.  

Its Q4 2022 EPS came in at $0.97, beating analyst estimates of $0.85 by $0.12. Revenues rose 12% YoY to $3.83 billion beating $3.66 consensus analyst estimates. Kellogg issued upside guidance for fiscal full-year 2023 of $4.20 to $4.29 versus $4.14 consensus analyst estimates. It sees full-year 2023 organic net sales growth of 5% to 7%, driven by sustained momentum in snacks and emerging markets. Kellogg shares pay a 3.61% annual dividend, trading at 16X forward earnings.

The MarketBeat MarketRank™ Forecast gives Kellogg 2 out of 5 stars with a 10.4% upside price target of $72.11 per share.

3M Company NYSE: MMM

The 3Ms stand for Minnesota Mining and Manufacturing started in 1902. This industrial giant is diversified throughout multiple industries, including consumer goods, industrial products, transportation, and healthcare. Its business operations have spread out through over 70 countries. You may be familiar with its Post-It notes and Scotch tapes. It also manufactures electronic products like connectors, touchscreens, and optical films. Its business has been sliding along with its shares which have pumped up the dividend yield to 5.39%.

Its Q4 2022 EPS came in at $2.28, missing consensus analyst estimates of $2.39 by ($0.11). Revenues fell (5.9%) YoY to $8.1 billion, missing analyst estimates of $8.09 billion. It lowered its full-year 2023 EPS of $8.50 to $9.00 versus $10.23 analyst expectations. This has caused shares to slide (9%) on the year as it trades at 12.8X forward earnings. The company will be shedding 2,500 manufacturing jobs as it expects sales to fall (2%) to (6%) in 2023.

The weak performance has caused some rumblings among activist shareholders. Fund manager Bert Flossbach raised concerns in a Jan. 28, 2023, letter citing the (32%) drop in shares versus the 62% rise in the S&P 500 during CEO Mike Roman's tenure. A CEO departure and replacement will become a bullish trigger if performance falls. Meanwhile, the cheaper valuations make both the stock and dividend more appealing, with more upside rebound potential. This is a situation of not chasing the entries but waiting for deeper pullbacks to maximize the compounding effect of a DRIP.

The MarketBeat MarketRank™ Forecast gives it 2 out of 5 stars with a 13.2% upside price target of $125.92 per share.