September 21, 2008 in Business

Dividend reinvestment plans can be sure, steady ways to save

Universal Press Syndicate
 

If you have just $20 or $30 per month to invest in stocks, you can do so effectively, thanks to dividend reinvestment plans (DRIPs).

DRIPs permit you to buy shares of a company’s stock directly from the company, bypassing brokers (and broker commissions!). Hundreds of major corporations (such as Nokia, Abbott Labs, Medtronic, ExxonMobil and PepsiCo) now offer these plans.

With traditional DRIPs, the company expects you to already own at least one share of its stock before you enroll, in your own name. So if you’re not already a shareholder, you’ll have to buy at least one share through a broker, paying the commission (learn about brokers with low commissions at www.broker.fool.com). Be sure to specify that you want the share(s) registered in your name, not the brokerage’s name, as is typically done. Then you can open a DRIP account with the company and buy additional shares directly through it (or its agent). If you already own shares, you may have to pay your brokerage a fee to switch the registration from its name to yours.

A newer variety of DRIPs, direct stock purchase plans (DSPs), operate in much the same way, except you needn’t own any shares before enrolling. You can buy your very first shares through them.

These plans permit you to “dollar-cost average,” building a position in a stock by regularly plunking a certain amount of money into it. They’ll even purchase partial shares for you. For example, if Coca-Cola is trading around $50 per share and you send in a $25 contribution, it’ll buy about half a share. When the price is low, you get more shares, and vice versa. (Be sure to keep detailed records of all your purchases, for Uncle Sam.) Some plans even let you buy stock at a small discount to the prevailing price. You can simply click over to the Web sites of companies you’re interested in, to see whether they offer these plans.

Learn more at www.fool.com/School/drips.htm, www.dripinvestor.comand www.dripcentral.com.

Ask the Fool

Q: I want to open a brokerage account, but the firms I checked require between $1,000 and $5,000 up front. What can I do? – T.R., Hickory, N.C.

A: Keep looking. Many brokerages, such as optionsXpress, don’t have minimums. Others have modest minimums, such as Scottrade’s $500. Details about and ratings for scores of brokerages can be found in SmartMoney magazine and other periodicals. You can learn about and compare brokerages online at www.smartmoney.com/brokers and www.broker.fool.com.

Note that commissions at many brokerages have fallen to as low as $5 or $10 per trade. This is a far cry from the typical discount commission of $30 to $50 a few years ago and the hundreds of dollars that some full-service brokerages will still charge you today.

Q: How long must I keep financial records, for tax purposes? – P.R., Racine, Wis.

A: It depends. Keep copies of all your tax returns forever, as you never know when they’ll come in handy. Keep canceled checks, deposit statements and receipts for at least three years, ideally seven. (If a check is related to next year’s tax return, hang on to it for an extra year.) Retain your stock trade confirmation receipts and statements for as long as you own the stock and for at least three years (ideally seven) after you close out your position in the stock (usually by selling). Keep proof of improvements to property for at least three years after the sale of the property. Keep escrow closing documents (for both the purchase and sale of property) for at least three years (yes, ideally, seven) after the property is sold. Be sure to think before you throw anything out.

My dumbest investment

I fell victim to online hype about Krispy Kreme Doughnuts stock back when it was around $30 per share, and bought in. Everyone knows the rest of the story – it’s trading around $4 per share these days. The experience taught me these lessons: (1) Buy quality, and hold. If it was good enough to buy in the first place, it’s good enough to hold unless the fundamentals of the company change. (2) Suppress greed and remain objective. We all want to prosper, but the old adage could never be more apropos than in investing – “If it sounds too good to be true, it probably is.” (3) Do homework and due diligence. Walk away from the hype. Unless you’re getting your stock advice from your mother, there is probably an agenda behind it. Ask yourself, “Why does this person want me to buy this stock?” If this sounds cynical, consider: It’s real money and it’s yours to lose. — Dr. L., online

The Fool Responds: You learned some great lessons, and your future investing should be much more profitable.


Thoughts and opinions on this story? Click here to comment >>

Get stories like this in a free daily email