3 Quality DRIP Stocks for Rising Long-Term Dividend Income

In the world of investing, few things have the wealth compounding ability of investing in high-quality dividend growth stocks. The best-of-the-best tend to have sustainable earnings moats, management teams that are willing and able to return cash to shareholders, and at least some measure of recession resilience. Investing in these companies allows investors to collect ever-rising amounts of cash from the company, and if the individual reinvests those proceeds, that compounding effect is amplified. Investors can manually reinvest proceeds by simply taking the dividends received and allocating them accordingly. However, we like stocks that offer dividend reinvestment plans, or DRIPs, because they allow a full hands-off approach to dividend stock wealth compounding over time. Let's take a look at what exactly a DRIP stock is, why they're attractive, and three examples of great dividend growth stocks that offer no-fee DRIPs. What Are Dividend Reinvestment Plans? In short, dividend reinvestment plans are a mechanism for shareholders to automatically reinvest their dividend proceeds in the same stock that paid the dividend. In other words, instead of receiving a cash distribution from the company paying the dividend, the shareholder simply receives the commensurate number of shares instead. In a simple example, let's assume an investor holds a stock that is trading for $50 per share, and that they hold 200 shares that each pay a dividend of $0.50 per share. If the investor doesn't have a DRIP on this stock, they'll receive the $100 in cash they're entitled to based upon how many shares they own. However, if they have a DRIP, that $100 will instead be used to buy two more shares of the company's stock ($100 in dividends/$50 share price), such that the investor will now own 202 shares. That may not sound like much, but over time, this double compounding effect means that the next time a dividend is paid, it will be on 202 shares rather than 200, and so on. This compounding effect is extremely powerful, and it is why we like high-quality dividend growth stocks for long-term wealth building. DRIP stocks take the guesswork and manual effort out of this, in that all the investor has to do is buy some shares, set up dividend reinvesting, and then the reinvesting is done automatically on behalf of the investor. It's a truly hands-off approach that we like very much, particularly for high-quality dividend growth names. Now, let's take a look at three of those names we think are great candidates for DRIP investing. 3 DRIP Stocks We Like Our first stock that we think is a great DRIP candidate is Emerson Electric , a technology and engineering firm that was founded in the late-1800s. Emerson has exhibited tremendous recession resilience over the years, and its broad and deep product portfolio has afforded it the ability to pay a rising dividend for each of the past 65 years. On that measure, it is one of the best dividend stocks in the world. Emerson's dividend growth hasn't been overwhelming in the recent past, with the average dividend increase coming in at about 3% for the past decade. However, it offers a market-beating 2.2% current yield, and an exemplary dividend safety rating, with its payout ratio at just 42%. In addition, we see mid-single-digit earnings growth accruing in the years to come, meaning the company should have plenty of capital to return to shareholders. Our next stock is Federal Realty Investment Trust , a retail-focused REIT that was founded in 1962. Almost since its inception, Federal Realty began paying -- and raising -- its dividend to shareholders. In fact, the trust has boosted its payout for 54 consecutive years, making it the only REIT on the list of Dividend Kings. Among a group that is generally fairly cyclical, Federal Realty stands above its peers for capital allocation and superior earnings quality. The trust has grown its payout at an average rate of about 4% annually in the past decade, and we see similar growth in the years ahead. The payout ratio is somewhat elevated at 73%, but it is worth remembering that REITs tend to have higher payout ratios. They are required to distribute most of their earnings to shareholders for tax purposes, so we aren't concerned by Federal Realty's payout ratio. In addition, it offers a 3.5% current yield, which is nearly triple that of the S&P 500. And with its portfolio of high-quality properties located in desirable markets, we see many more years of dividend increases for Federal Realty. Our final stock is consumer staple and industrial conglomerate 3M Co. . The company was founded in 1902, and in the 120 years since, has built an enormous portfolio of safety, transportation, office, and healthcare products. Today, 3M is a leader in such products and that predictable stream of revenue and earnings has helped it boost its dividend for 63 consecutive years. In addition, 3M's average dividend raise in the past decade is close to 10%, so the company is not only outstanding in terms of dividend longevity, but it has posted sizable increases as well. Safety is still very strong despite this, with the payout ratio under 60% for this year, meaning it has plenty of room to continue to grow the payout in the years to come. We also see 5% annual earnings growth, which will provide ever higher amounts of capital that can be returned to shareholders. The final reason we like 3M as a DRIP stock is because its current yield is 4.0%, which is triple that of the S&P 500. So on pure income stock terms, 3M is extremely attractive for current yield, dividend growth, safety and growth potential. Final Thoughts When it comes to compounding wealth, a hands-off approach is best for many investors. Stocks that offer dividend reinvestment plans take the guesswork out of dividend investing, and we like Emerson, Federal Realty, and 3M for their combination of current yield, dividend longevity, dividend safety, and dividend growth potential. All of these factors make for a great DRIP stock, and for investors looking to gain exposure to long-term dividend stock compounding, they are a terrific place to start.

3 Quality DRIP Stocks for Rising Long-Term Dividend Income

Dividend reinvestment plans offer a full hands-off approach to dividend stock wealth compounding over time.

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