Investors Who Get Drop On Drips Soak Up Savings

There has been quite a bit to cheer about lately for fans of dividend reinvestment plans.

Thanks to recent regulatory rulings, it seems likely that more and more companies will operate these programs with a popular feature allowing direct cash purchases of stock.

At the same time, increasing numbers of brokerage firms are offering their own variations on DRIPs.

But close followers of the DRIP scene say the picture can still be confusing, and the vision they nurture of widespread direct investment in stocks remains a long way from reality.

For one thing, says Charles Carlson, editor of the newsletter DRIP Investor in Hammond, Ind., “what brokers have done is to capitalize on the growing popularity of the DRIP concept by offering versions that are very different from company-sponsored plans. What you expect may not be what you get.”

Automatic dividend reinvestment is an old idea that has been in use for decades at just about all mutual funds and a number of publicly traded corporations as well, including such big names as American Telephone & Telegraph, Exxon, McDonald’s and Procter & Gamble.

The basic arrangement: Instead of receiving periodic dividend or distribution payments by check, you can elect to have the money automatically reinvested in additional shares of the stock or fund involved.

As an added incentive to participants, many plan sponsors offer the reinvestment at no charge, or at least a reduced rate from the standard commission - sometimes even putting the stock up for sale at a small discount to the market price.

Following the example of mutual funds, some companies took the idea a step further by allowing participants to buy additional shares for cash through DRIPs, within specified limits, and to make their initial purchases of a stock this way. Carlson refers to these as “no-load stocks.”

Thanks to recent rulings by the Securities and Exchange Commission, the process for a company to get its direct-purchase plan approved has been simplified and shortened.

One key aspect of DRIPs in general, and direct purchase plans in particular, is that they bypass the middleman, or broker. So they naturally have not gotten much favorable attention from Wall Street.

So what are brokers doing setting up their own DRIPs? Well, says Carlson, their plans generally focus on the plowing back of dividends, while offering little or nothing in the way of direct optional-cash-purchase benefits, especially in small amounts.

“Try telling your broker that you want to make an optional cash investment into your DRIP of $25,” he says. “After he or she stops laughing, he or she will probably say you can’t invest just $25.

“And if you find a broker who is willing to take your money, expect to pay at least $20 or $30 in commissions to invest that $25.”

Brokerage firms also generally require participants in their DRIPs to register their investments in “street name” with the firm, rather than in their own names, which effectively makes them ineligible to participate in company-sponsored DRIPs.

Both broker and company-sponsored DRIPs offer some of the same attractions -comprehensive statements for recordkeeping, for instance, and convenience of putting dividend money to work so that your investment can compound over time.

But whether because of cost, regulatory headaches or other problems, DRIPs particularly those with direct investment features - have not yet become as universally available as their partisans think they could and should.

They suggest shareholders write companies to encourage creation of direct investment plans.

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