DRIPs let investors buy direct, and save
The cheapest way to buy stocks may not entail ringing up one of the new breed of discount brokers, often found on the Internet.
Forget trades of $7.50, or $10 or $19. Think pennies! Or even free!
When Warren Poole, a retired chief air controller with the US Navy, buys stocks, he looks for "quality companies that might be out of favor" and that have "especially low" transaction costs.
Mr. Poole buys stocks through corporate dividend reinvestment plans (DRIPs) - either directly from the company, or via investment-club programs. And Poole, who lives in Pensacola, Fla., likes to dole out "pennies" for his commission charges - "not dollars" usually sought by brokers.
Among his current holdings: Intel, the computer chipmaker, Johnson Controls, which produces automotive systems, and Washington Mutual, a financial firm.
Poole is one of an estimated 3 million to 4 million investors now buying stocks through DRIPs. Companies with DRIPs will usually let you automatically reinvest your dividends in additional stock, without having to go through a broker.
Not only that, many companies will also let you buy your initial shares directly from the company. That way, you can completely bypass having to deal with a stockbroker.
Dividend reinvestment plans are one of the "best-kept secrets" in the financial world, says Charles Carlson, editor of the "No-Load Stock Insider," a newsletter, and author of "No-Load Stocks," (McGraw Hill), a book on DRIP investing.
That's not coincidental, says Mr. Carlson. Brokerage houses have long fought DRIPs, which, of course, reduce - or totally eliminate - brokerage commissions. And brokers have made their clout felt in Washington. Thus, firms that offer DRIPs aren't allowed to broadly advertise them. But they can note that they provide DRIP services in their company brochures.
"Some 1,100 companies currently offer divided reinvestment plans," says Carlson. Of those, about 500 also let you buy your first share directly from the company. US firms with direct purchase plans include Disney, Exxon, Wal-Mart, Home Depot, Walt Disney, and IBM.
Another 250 or so overseas firms offer DRIPs through American depository receipts, (ADRs). These are shares of overseas firms traded on US stock exchanges. Overseas firms with DRIPs include Nokia, Sony, and British Airways.
To enter a DRIP, you must first be a shareholder of record in the company. But that can be a challenge. It is not enough to own shares in a company through a brokerage account - where the shares are registered in the broker's name. The registration has to be in the shareholder's name.
There are at least four ways investors can get their name on a firm's books:
1. If they already hold shares in a street account, they can ask the broker to transfer their shares to certificate form. With the certificate, they can then contact the company and ask that current and future shares be held in their own name.
2. They can buy a share or shares through companies that sell stock directly to the public.
3. They can buy at least one share through a broker, asking that it be put in their name.
4. They can buy initial shares through investment club programs offering "initial shares."
Most DRIPs require a minimum initial investment. Disney and McDonald's require at least $1,000. GE and Procter & Gamble, require $250. But many firms will also let you buy in on a monthly low-cost investment plan. Disney, for example, requires monthly investments of at least $100 until you reach $1,000.
Once you are signed up with a company, you can ask them to reinvest your dividends into additional shares. Some companies will let you do so on a partial basis, taking part of your dividends in cash, part in reinvested shares.
Depending on the company, you may also be allowed to make additional cash investments at any time. Minimums often range from $10 to $100.
If there is a problem, experts agree it comes at tax time. Figuring your cost basis can be a nightmare, if you sell partial shares. The reason: You have usually purchased shares over time, each one incurring a separate cost basis. Reinvested dividends are also treated separately.
"If you are buying DRIPs you've got to be prepared to do more record-keeping than you would do with regular stock purchases," says Lewis Altfest, president of financial services firm L.J. Altfest & Co., New York.
"Don't let the tail wag the dog," he adds. "You should only buy stocks through DRIPs if the stock is desirable. You don't want to buy the stock just because it has a DRIP plan."
Still, most DRIP investors, like Warren Poole, are buy-and-hold investors. Then, when they do sell, they sell all their shares or large batches of shares, which makes tax computation about the same as for normal non-DRIP stock holdings.
(c) Copyright 1999. The Christian Science Publishing Society