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DRIPS can be a steady, effective investment

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 Wal-Mart, ExxonMobil and PepsiCo) now offer these plans, with more companies introducing them every day.

With traditional DRIPs, the company expects you to already own at least one share of its stock before you enroll. The share must also be in your name, so if you’re not already a shareholder, you’ll have to buy at least one share through a broker, paying the commission. You’ll have 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 the company (or its agent). If you already own shares, you may have to pay your brokerage a little 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 they don’t require you to own at least one share before enrolling. You can buy your very first shares through them.

DRIPs permit you to “dollar-cost average,” building a position in a stock by regularly plunking a certain amount of money into it. DRIPs will 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. Some DRIPs even let you buy stock at a small discount to the prevailing price.

Learn much more at www.fool.com/School/drips.htm, www.dripcentral.com and www.dripinvestor.com. The National Association of Investors Corp. offers its own version of DRIPs, called the Low Cost Investment Plan. For more info, give them a jingle at (877) 275-6242. You can also simply click over to the Web sites of companies you’re interested in to see whether they offer these plans.

Ask the Fool

Q: Are bonds or bond mutual funds better for investors? — M.D., Gary, Ind.

A: First off, understand that long-term money is likely to grow more quickly in stocks than bonds. But if you’re seeking some traditional conservative investments, read on.

With traditional bonds, you buy them for a fixed amount and the interest rate tells you exactly how much you can expect to receive. If a $10,000 bond pays 7 percent over 10 years, you’ll receive $700 each year over that period (then you’ll get your $10,000 back).

Meanwhile, bond mutual funds, often called “fixed-income” funds, typically pay monthly dividends. These fluctuate, though. You may invest $10,000 in one such fund that sports a dividend yield of 7 percent. But that amount will change with interest rate changes, and as the fund manager buys and sells various bonds using his judgment. You may receive more or less than your original $10,000 investment upon withdrawing from the fund, too. And bond funds charge annual expense fees.

Bond funds offer instant diversification, but individual bonds permit you to plan your financial future more precisely. Learn more at www.smartmoney.com/onebond/ index.cfm?story=5 and get additional retirement guidance at www.fool.com/retirement.htm.

Q: Will I pay less capital gains tax by realizing gains in a year when my income is less than normal? Or is the amount the same whether my income is high or low? — R.B., Winona, Minn.

A: The tax will be the same, 15 percent for long-term gains, unless your income is so low that you’re in the 15 percent or 10 percent bracket. Then the long-term gain rate is just 5 percent. Short-term gains are taxed at your ordinary income tax rate. If you have capital losses, you can offset your gains with them.

My smartest investment

My smartest investment move was predicting the Tyco meltdown and selling my 1,300 shares at $48. I sold all my stock the day after CEO Dennis Kozlowski appeared on CNBC touting his plan to have initial public offerings (IPOs) for three Tyco divisions. In that interview, it seemed that Kozlowski was focused only on the stock price and not on the business. On the company’s balance sheet, the “goodwill” line item was increasing considerably each year, as Tyco seemingly overpaid for most of its acquisitions. — Tom Osborne, High Bridge, N.J.

The Fool Responds: You were smart to be keeping an eye on your holdings’ financial statements. That’s often where investors can get early hints that something’s wrong. Other red flags to look for include accounts receivable or inventories increasing faster than revenues. Learn more about evaluating companies at www.fool.com/shop/howto/index.htm and in “The Edgar Online Guide to Decoding Financial Statements” by Tom Taulli (J. Ross, $35).

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