Photo by Nicholas Cappello on Unsplash

DRIP stands for Dividend Reinvestment Plan. When investors are enrolled in DRIP stocks, their incoming dividend payments are automatically used to purchase more shares of the issuing company. In this way, they compound their dividends by investing them in their favorable holdings. This is a great way for investors to compound the income stream they receive.

The best form of DRIP is offered by some Dividend Aristocrats, which offer no-fee DRIP. The merits of the absence of fees are obvious, as investors are allowed to reap the full benefit from their income stream. The merits of reinvesting dividends in Dividend Aristocrats is obvious as well, as the incoming dividends are essentially invested in growing dividends. In this article, we will discuss the prospects of three high-quality, no-fee DRIP stocks, namely Exxon Mobil (XOM), AbbVie (ABBV) and Aflac (AFL).

Exxon Mobil

Exxon Mobil is the second-largest oil and gas company in the world, behind only Saudi Aramco, with a market capitalization of $371 billion. It produces oil and natural gas at a 60/40 ratio and is one of the most integrated oil majors, with significant contribution from its refining and chemicals segments.

Exxon is well-known for its defensive business model, which results from its integrated structure. During downturns of the energy sector, its refining and chemicals segments usually provide a strong buffer to the overall performance.

This was not the case in 2020, when the coronavirus crisis caused a collapse in the price of oil as well as multi-year low refining and chemical margins. As the pandemic formed a perfect storm for Exxon, the oil giant incurred its first loss in more than a decade in 2020.

Fortunately, Exxon has recovered strongly from the pandemic, along with the energy market. Thanks to the rebound of oil and gas prices, the company switched from an adjusted loss per share of -$0.33 in 2020 to earnings per share of $5.38 in 2021, a 7-year high level.

Even better, the business momentum of Exxon has accelerated this year thanks to the invasion of Russia in Ukraine. The sanctions of Europe on Russia have greatly tightened the oil market, as Russia exports approximately 5.0 million barrels per day (~5% of global supply). As a result, the price of oil has rallied to a 13-year high this year.

The situation is even more dramatic in the natural gas market. Europe generates 31% of its electricity from natural gas provided by Russia. In an attempt to reduce its reliance on Russia, Europe has begun to import a great number of LNG cargos, which are produced in the U.S. Consequently, the U.S. natural gas price has skyrocketed to a 13-year high lately. Overall, the current business environment is ideal for Exxon, which is likely to post decade-high earnings per share this year.

Exxon is a Dividend Aristocrat, with 39 consecutive years of dividend growth. Due to the high cyclicality of the oil industry, there are only two Dividend Aristocrats in the oil industry, namely Exxon and Chevron (CVX).

Exxon is currently offering a 4.0% dividend yield. As long as the sanctions of western countries on Russia remain in place, the oil giant will keep thriving. Management has stated that the dividend is sustainable even at oil prices around $41 thanks to the high-grading of the asset portfolio of the company, which now includes primarily low-cost reserves. Overall, the dividend of Exxon has a wide margin of safety for the foreseeable future.

AbbVie

AbbVie is a biotechnology company focused on developing and commercializing drugs for immunology, oncology and virology. It was spun off by Abbott Laboratories in 2013.

AbbVie has a short history as a standalone company but it has an impressive performance record. Since its spin-off, AbbVie has grown its earnings per share every single year, at a 19% average annual rate. In addition, thanks to the essential nature of its products, the company has proved resilient throughout the coronavirus crisis. To be sure, the pharmaceutical giant grew its earnings per share by 18% in 2020 and by 20% in 2021.

Even better, business momentum has improved further this year. Management has provided guidance for earnings per share of $14.00-$14.20 in 2022. At the mid-point, this guidance corresponds to 11% growth vs. 2021.

The only point of concern for AbbVie is the imminent patent expiration of its blockbuster drug, Humira, in the U.S. in 2023. Humira is used in the treatment of rheumatoid arthritis and currently generates 31% of the total revenue of AbbVie. Its patent expired in Europe in late 2018 and caused a 31% plunge in revenues in 2019 and a 14% decrease in revenues in 2020.

However, AbbVie has done its best to protect its revenues after the expiration of the patent of Humira in the U.S. The pharmaceutical giant has developed two other auto-immune drugs, Rinvoq and Skyrizi, which are likely to provide a strong buffer after the expiration of Humira. Notably, AbbVie generated 43% of its total revenues from Humira in 2020 but only 31% of its total revenues from Humira in 2021. As the company keeps doing its best to reduce its reliance on Humira, it is likely to keep the effect of the patent expiration on its results under control. To alleviate the concerns of investors, the company has stated that the total revenues in 2025 will be higher than those in 2020.

Moreover, AbbVie has raised its dividend every single year since its spin-off, at an average 5-year annual rate of 17%. The stock is currently offering a 3.5% dividend yield, with a low payout ratio (40%). Given its healthy payout ratio, its solid balance sheet and its resilience to recessions, AbbVie has ample room to keep growing its dividend at a fast pace for many more years.

Aflac

Founded in 1955, Aflac is the largest underwriter of supplemental cancer insurance in the world. The diversified insurer also provides accident, short-term disability, critical illness, dental, vision, and life insurance. Aflac generates approximately 70% of its pre-tax earnings from Japan and the remaining 30% from the U.S.

Due to its high exposure to Japan, investors should be aware of the impact of any headwind in the Japanese economy on Aflac, including the effect of a weakening Yen. Nevertheless, Aflac has exhibited a strong performance record, with 8.8% average annual growth of earnings per share over the last decade.

Moreover, Aflac has proved rock-solid throughout the coronavirus crisis. Although low interest rates continued to exert pressure on investment income, the insurer grew its earnings per share by 12% in 2020 and by another 21% in 2021, to a new all-time high. The strong performance resulted primarily from high investment gains.

On the one hand, some investors may be worried about the future growth prospects of Aflac, as the company operates in two mature markets, namely Japan and the U.S. On the other hand, the company will greatly benefit from the expected hikes of interest rates, after a whole decade of depressed interest rates. Therefore, it is reasonable to expect the insurer to grow its investment income significantly in the upcoming years and thus grow its earnings per share at a mid-single-digit rate.

Income-oriented investors have greatly benefited from the resilient business model of Aflac, as the company raised its dividend by 18% in 2020 and by another 21% in 2021. The company has thus grown its dividend for 40 consecutive years. Moreover, given its remarkably low payout ratio of 26%, Aflac can continue raising its dividend meaningfully for many more years.

Final Thoughts

The above three stocks are Dividend Aristocrats which are now offering above-average dividend yields. As they are thriving in their current business environment and sport markedly low payout ratios, they have ample room to keep growing their dividends significantly for many more years. Therefore, they are attractive candidates for the investors who want to initiate a dividend reinvestment plan.