Drips Drop Cost Of Buying Stock
Discount. Freebie. Cheap. Bargain.
Few cost-conscious consumers can resist the lure of a good deal - be it a clearance markdown on a winter coat, a two-for-one special at the grocery store or a bargain-basement house sale.
In the financial world, frugal investors are taking advantage of dividend reinvestment plans (DRIPs), which use dividends to buy more shares of a company’s stock without paying a broker’s commission.
“With DRIPs, it lets me use all the money I want to invest, on the investment,” said Ernie Cohen, a Lexington, Ky., resident. “I don’t lose anything on commissions.”
With dividend reinvestment plans, Cohen, a chemist with the state, bypasses the need for a broker to execute his order.
It’s a painless method to boost a stock portfolio.
“I used to just take the dividends and just plunk them in the bank or cash them,” Cohen said.
Dividend reinvestment plans are growing in popularity because they give investors a way to snap up more shares, often without any fees.
With many DRIPs, companies will take your dividends and buy more shares without charging an administration fee. If a firm has a DRIP handling fee, it generally is low.
About 860 publicly traded U.S. and Canadian companies offer DRIPs, said Sumie Kinoshita, editor of the “Directory of Companies Offering Dividend Reinvestment Plans” (12th Edition, Evergreen Enterprises, $29.95).
“Get the latest prospectus for a DRIP,” Kinoshita said. DRIP plans change often, and each has its own rules. For example, one company might require DRIP investors to initially buy a minimum of one share, she said, but another might require a purchase of at least $50.
About 80 percent of DRIPs also have a cash purchase feature, Kinoshita said, giving investors the opportunity to buy more shares on their own if they want.
Cash purchases are flexible. They do not have to be a set amount and do not have to be made regularly.
However, each company has its own schedule - weekly, monthly, quarterly - for cash purchase transactions. So nit-picky investors who fret over the exact timing of stock purchases amid market fluctuations should read the plan prospectus closely.
Although they are not as common as they once were, some dividend reinvestment plans offer another carrot to investors: discounted share prices.
These stock discounts are for reinvested dividends; some might also apply to DRIP cash purchases.
A few DRIPs also offer the flexibility of reinvesting a portion of the dividends while cutting a check to the investor for the rest. It’s not a common feature, but those investors who count on dividends for living expenses might want to check for this, Kinoshita said.
As with all investments, Kinoshita cautioned the inexperienced investor against jumping blindly into DRIPs.
“Unlike a mutual fund, there’s no diversification. And they will have to do their own research,” she said.
That’s not a problem for many DRIP investors who prefer doing their own stock research.
To keep up with market trends, Ray Linck, a Lexington business analyst subscribes to The Wall Street Journal and Money magazine. Linck is president of the Bluegrass Council of the National Association of Investors Corp., a non-profit organization of investment clubs and individual investors.
The group “has a philosophy of picking companies for the long run and they give you a methodology for you to do your research,” said Linck, a 10-year DRIP investor who uses the plan to buy new shares of McDonald’s Corp., Bob Evans, Texaco and AFLAC.
The investors group, which offers a low-cost investment strategy for about 140 companies offering DRIPs, can be useful for the beginner just starting out with dividend reinvestment plans, Kinoshita said. NAIC offers seminars, publications and monthly picks for both individuals and investment clubs.
And last December, the Securities and Exchange Commission relaxed DRIP regulations, speeding up the process for companies that want to offer what is known as a “direct purchase DRIP” in which the investor can buy the initial shares directly from the company.
By the end of July, Evergreen Enterprises listed 28 companies that offer direct initial purchase. (In 1986, only six such plans were available).
An additional 10 companies offer direct purchase of shares for DRIPs for residents of the state where the company operates
xxxx DIRECTORY LISTS COMPANIES Where to look for more information on direct investing: Directory of Companies Offering Dividend Reinvestment Plans. Contact Evergreen Enterprises, P.O. Box 763, Laurel, Md. 20725-0763. (301) 549-3939. $29.95 plus $2.50 shipping. American Association of Individual Investors, 625 North Michigan Avenue, Suite 1900, Chicago, Ill., 60611-3110. (312) 280-0170. Membership is $49 and includes a subscription to AAII Journal and The Individual Investor’s Guide to Low Load Mutual Funds, a tax-planning guide. National Association of Investors Corporation. (810) 583-NAIC. Individual membership is $35 a year, includes subscription to Better Investing. Better Investing, a monthly NAIC magazine, costs $20 a year. DRIP Investor, a monthly newsletter. $79 a year. (219) 931-6480.