Monday, September 22, 2008

Potential Dividend Reinvestment Plan (DRIP) Investment Screening by Morningstar.com

This weekend I ran a stock screen on Morningstar.com. I looked for companies that:

- Scored an "A" in stewardship (highest score for fiscal responsibility)
- Wide economic moat (tough for competitors to enter same market)
- Were rated at 5 stars (Morningstar's highest rating)
- Were available via dividend reinvestment plans (DRIPS)
- Low level of uncertainty about companies fair value (best level based on quality of earnings visibility, predictability of future income).

Here's what my search turned up:

Microsoft Corporation (MSFT), Business Appl, Consider Buying $29.80
Paychex Inc (PAYX), Data Processing, Consider Buying $43.40


MSFT closed Friday at $25.16, 18.4% below the consider buying price
PAYX closed Friday at $32.89, 32% below the consider buying price

From a DRIP investing perspective, PAYX is the only good choice. MSFT charges a whopping $2.5 per transaction plus 10 cents per share. It's smarter to simply use limit orders on a discount brokerage account for MSFT and name your own price. As for PAYX, there are zero fees for cash investments, auto-investments or dividend investments. You can start a PAYX DRIP by going directly to American Stock Transfer and shelling out $250 for an initial investment. $250 to much? Then go to Directinvesting and buy just one share. If you do this, you'll pay a one time commission that is pretty large... You decide.

PAYX has been on my interest list in the past. I don't plan on starting a PAYX DRIP now. I've got over 20 as is. I was merely doing the Morningstar search to see if any of my DRIPS would pass the criteria. My largest DRIP holdings are Exxon Mobil (XOM), Bank of America (BAC), Aflac (AFL), 3M (MMM), Southern Company (SO), Johnson & Johnson (JNJ) and Home Depot (HD).

If you're interested in setting up a DRIP in any of the above companies or a non listed company, you should start at Directinvesting. Use the Directinvesting search tool and find the "agent name" in the company prospectus supplied by Directinvesting. Next, google the named agent and see if you can buy the stock at their site for little to no initial cost. If not, go back to Directinvesting and use them for the initial purchase and transfer to the named agent. Using Directinvesting typically costs $25 - $50 in initial commission. I've used Directinvesting to establish about half of all my DRIPS. I established all the other ones by going directly to the agent used for each company's DRIP administration. Some of the most common Agents used are Computershare, Wells Fargo and New York Mellon.

Aside: I use Morningstar.com for much of my research. I get a free subscription through my employer (U.S. Navy). If you don't want to subscribe to Morningstar, a good alternative is Yahoo Finance.

1 comment:

Hank said...

Great tips and advice on which websites to go to! I love investing in DRIPs.