Two High-Quality DRIP Stocks For Income-Oriented Investors

DRIP stands for Dividend Reinvesting Plan. When an investor is enrolled in DRIP stocks, the incoming dividend payments are used to purchase more shares of the issuing company automatically. There are some Dividend Aristocrats which offer the option of no-fee DRIP.

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As a result, investors can automatically use their dividend income to buy more shares of these stocks, which pay rising dividends year after year. The merits of this strategy are obvious. In this article, we will analyze the prospects of two no-fee DRIP stocks, namely S&P Global (SPGI) and Realty Income (O).

S&P Global

S&P Global is the largest credit rating firm in the world. The three major credit rating agencies, namely S&P Global, Moody's (MCO) and Fitch, possess more than 90% of the total market share in the credit rating business. As a result, S&P Global operates in a business that is essentially an oligopoly.

All the countries and companies are essentially obliged to resort to one of these three companies in order to attract a sufficient number of buyers for their debt issuances. If their debt is not rated by one of these three agencies, they will not attract enough buyers or they will have to pay a higher interest rate.

Moreover, the business of S&P Global is extremely profitable. The company needs to spend minimal amounts on capital expenses and hence most of its operating cash flows end up in its free cash flows. In each of the last five years, S&P Global has spent less than 10% of its operating cash flows on capital expenses. As a result, it has enjoyed excessive free cash flows.

The wide business moat and the excessive free cash flows are two of the primary investing criteria of Warren Buffett. This helps explain why Berkshire Hathaway (BRK.B) has a 13% stake in the other major credit rating firm, Moody’s.

Thanks to the sustained increase in global debt, S&P Global has more than doubled its revenues and has more than tripled its earnings per share over the last decade. It also has an exceptional dividend growth record, with 48 consecutive years of dividend growth.

Moreover, the company will greatly benefit from the coronavirus crisis, which has led numerous countries and companies to issue unprecedented amounts of debt. Due to the hefty debt issuance, many countries and companies will have to restructure or refinance their debt in the upcoming years. As a result, they will provide a strong tailwind to the business of S&P Global. Overall, the company has an impressive growth record, a wide business moat and exciting growth prospects ahead.

Realty Income

Realty Income is a REIT focused on retail properties, with more than 4,000 properties in its asset portfolio right now. Realty Income owns retail properties that are not part of a wider retail development (such as a mall), but instead are standalone properties. This feature is of paramount importance, as it renders Realty Income resilient to the secular decline of malls.

Most REITs have been negatively affected by the coronavirus crisis, which has put some of their tenants under great pressure. Realty Income is a bright exception, as it has proved resilient to the pandemic. To be sure, the trust has posted record funds from operations (FFO) per share in each of the last two years. Even better, Realty Income has provided guidance for FFO per share of $3.84-$3.97 in 2022. At the mid-point, this guidance implies 9.1% growth over last year.

Realty Income has grown its FFO per share at a 5.9% average annual rate over the last decade. More importantly, it has consistently grown its bottom line, every single year for more than a decade. The REIT has managed to grow consistently thanks to the acquisition of high-return properties and rental hikes in its existing properties.

Moreover, Realty Income is famous for its exceptional dividend growth history and its monthly dividend payments. More precisely, the trust has raised its dividend for 96 consecutive quarters. As this period includes two recessions and the coronavirus crisis, the dividend growth streak is certainly impressive.

Furthermore, Realty Income is currently offering a 4.3% dividend yield. It is also worth noting that Realty Income spends less than 1% of its net operating income on capital expenses thanks to its disciplined business model. As a result, it enjoys excessive free cash flows and funds from operations. Given its reliable cash flows and its decade-low payout ratio of 79%, Realty Income can easily continue raising its dividend for many more quarters.

Final Thoughts

Volatility has greatly increased in the stock market lately due to fears that the aggressive interest rate hikes of the Fed may hurt the economy. Such tumultuous periods sometimes lead investors to careless investing decisions, which severely hurt their long-term returns. The above two stocks have repeatedly proved resilient to recessions and hence they are ideal candidates for risk-averse investors with a long-term investing horizon.

Disclosure: The author does not own any of the stocks mentioned in this article.

Disclaimer: Sure Dividend is published as an information service. It includes opinions as to buying, selling ...

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