Building Your Portfolio, DRIP by DRIP

If you're building a stock portfolio, you don't need to have a big pile of money to get started. You can easily start on a smaller scale, especially if you look for companies that offer dividend reinvestment plans, or DRIPs.

Dividend reinvestment plans are the best way to go if you want to reinvest your stock dividends in the company's shares instead of having dividend payments sent to you. DRIPs allow you to purchase shares from the company itself; by eliminating the middleman, you'll avoid paying hefty commissions to buy just a few shares. In addition, most companies with DRIPs will also allow you to make additional cash purchases without a big fee. That makes them ideal for investors who want to follow a disciplined investment plan and invest regular amounts of money over time.

For this week's Five-Star Investor, we used Morningstar's  Premium Stock Screener to find companies that offer DRIPs. About 900 companies in Morningstar's database offer DRIPs, ranging from gigantic companies like General Electric (GE) and Microsoft (MSFT) to smaller-cap stocks like Schnitzer Steel Industries (SCHN) and Stride Rite . 

After sorting for firms with DRIPs, we narrowed the field to companies that also boast wide economic moats and below-average business risk. We always favor stocks of companies that boast a strong competitive advantage (what we call an economic moat) because it's one of the key things that separates great investment ideas from the rest of the pack. And finding companies with wide moats is particularly important if you plan to stick with the stock for many years. 

All told, about 25 companies made the final cut. While a few of these stocks (namely Dow Jones , American Express (AXP), and 3M (MMM)) look pricey right now based on our fair value estimates, most of them boast at least 3 stars in their Morningstar Rating for stocks.

Here are some highlights:

 Anheuser-Busch (BUD)
Morningstar Rating: 4 Stars
From the  Analyst Report: "Anheuser-Busch's steady third-quarter performance in the face of difficult category conditions demonstrates why we love this stalwart company so much. Now that the share price offers nearly a 20% margin of safety, the stock looks attractive to us.... While Anheuser-Busch may not offer the thrills and chills of a high-flying stock, the firm consistently pumps out slow and steady volume growth, rolls out price increases, and ekes out cost efficiencies."

 Colgate-Palmolive (CL)
Morningstar Rating: 4 Stars
From the  Analyst Report: "Colgate shares got rocked after the company reported mediocre third-quarter results, but we didn't see anything to significantly change our long-term view of the company or fair value estimate. We'd pick up shares at a 20% discount to our fair value estimate."

 McGraw-Hill (MHP)
Morningstar Rating: 4 Stars
From the  Analyst Report: "While McGraw-Hill's media and education business segments struggled in the third quarter, the Standard & Poor's unit sparkled, increasing its sales and operating profits by 15% and 33%, respectively, from the prior-year period. This demonstrates the strength of McGraw-Hill's business model, which we'd happily buy into at a 20% discount to our fair value estimate."

 Microsoft (MSFT)
Morningstar Rating: 4 Stars
From the  Analyst Report: "Microsoft's peak growth years may be behind it, but the company is still a cash-generating machine, and more of that cash is likely to flow directly into investors' pocketbooks during the coming years."

 

To run this screen yourself and see all the stocks that passed, click  here. (The stocks mentioned above passed our screen as of Nov. 20. The results of the screen may change due to daily price fluctuations or other factors.) After clicking, you can save the search to use later by clicking the "Save Criteria" button in the bottom right-hand corner of the screen. (Note: You will need to be aPremium Memberto view and save the complete screen.)