How would you like to be able to buy stock for no commissions?
What if you could buy $25 worth of an $80 stock at a time?
Wouldn’t it be nice to arrange for that $25 to automatically happen monthly?
What if that stock paid a dividend? Wouldn’t it be outrageously cool if that dividend were automatically re-invested as partial shares? And then it would compound and you’d be paid dividends on those partial shares?
You’ve probably guessed that these are not just rhetorical questions. It’s called a Dividend Re-Investment Program, or DRIP, for short. Even some companies that do not pay a dividend offer similar plans called Direct Stock Purchase Plans.
They are usually exceedingly simple – you either purchase a set number of shares that qualify you for the Plan or agree to purchase a specified dollar amount for a specified number of months. You have to actually enroll in the Plan, and depending on your state and/or tax status may need to sign a form and send it in too.
And it really is as cool as my rhetorical questions make it sound. The transfer agent for the plan takes your specific dollar amounts that you send in, adds it in with all other Plan contributions for the period, makes the purchase, and credits your account with the dollars invested divided by the share price (there are commissions, but they are spread across potentially thousands on dollars of contributions – netting out to fractions of cents). So if you contribute $50 and the stock happened to be purchased at $40 per share, you’d be credited with 1.25 shares. If that stock paid a $0.40 dividend, then you would be credited with an extra .01 shares – so your new total would be 1.26 shares. There are minimum amounts that you can contribute … some Plans are as low as $10 a month.
Companies such as Exxon-Mobile, Intel, and Johnson & Johnson have DRIPs, but it’s not limited to large corporations. Mid-caps and small-caps are represented; smaller local utilities offer them too. I grew up in central Maine, and Bangor Hydro-Electric offers one.
I think they are an ideal way for children to learn about the stock market. They get to see compounding work in front of them, and the long term buy-and-hold strategy is an excellent lesson in saving, investing, and patience.
Really, the only downside is taxes and cost-basis tracking. Uncle Sam wants what’s his… and just because the dividends were re-invested, please know they are still taxable. But until you’ve built up enough shares so that you’re getting hundreds of dollars a year, the real effect of them is nothing more than an extra item to add on your tax return. When you do sell, you need to know the purchase price of all those monthly or quarterly optional buys, plus all your quarterly dividend purchases. But really, a simple spreadsheet suffices – enter the date, dollar amount, and share price when you get your statements and you’re good to go.
Finally, even the last two items are not an issue if you happen to pick a stock that allows the plan as an IRA. There are even a couple plans that pay YOU to invest – send in optional purchases and they will credit you 105% in shares, for example.
There is a service that will handle the whole registration process for you – www.temperofthetimes.com is one that I have used (I’ve had DRIPS in BankOne (now JP Morgan), Corning, Intel, and Pfizer). You can do it yourself, but for me the $20 fee was worth avoiding the hassle. You can search their DRIP database at www.directinvesting.com/advanced_drip_search.cfm?from=search. You can also contact the companies or transfer agents yourself to learn more. Look at computershare.com for examples of the companies that offer Plans and their details, at www-us.computershare.com/Investor/Plans/PlansList.asp?cc=US&lang=en&bhjs=1&fla=1&exp=true&theme=cpu.
Finally, I’d be remiss if I did not mention that newer brokerage services such as ShareBuilder.com and others basically offer the same service (at least for purchasing partial shares), all without having to register with each separate company.
Feel free to Comment or email me at Trond24@gmail.com if you have questions about specific companies, or would like more details about DRIPs.
Regards,
Trond
Friday, February 6, 2009
Wednesday, February 4, 2009
Info on Madoff hearings
If you are curious about the guy who testified today regarding his warnings to the SEC from 2000 through 2008 about Bernard Madoff, you can see his full prepared testimony at the link below...
http://online.wsj.com/public/resources/documents/MarkopolosTestimony20090203.pdf
Regards,
Trond
http://online.wsj.com/public/resources/documents/MarkopolosTestimony20090203.pdf
Regards,
Trond
Great Expectations
First, a little background.
STOCK INVESTING IS NOT A GAME TO ME. I have a day job, two kids, and a wife who equates the stock market to a casino. Two years ago, I let myself accumulate just over 13,000 shares in a little biotech company called Dendreon. At a cost basis of about $4.50 a share, this $60K, spread between my IRA and brokerage account, was a SIGNIFICANT fraction of my assets – a much higher percentage than I, who pride myself on my personal finance knowledge, would ever recommend anyone investing in one risky stock.
Why did I do this? Lots of little reasons… but it boiled down to a couple reasons. I believed in the drug that was up for FDA approval, and it made me feel good to invest in something that has potential to save lives. (Provenge is an immunotherapeutic vaccine for prostate cancer)
Now, built into that “belief” was an enormous amount of due diligence. The final block of shares that I bought was after the FDA released the briefing docs that the Advisory Committee it had convened would be using to aid them in their discussion. Routinely negative and devoted to picking apart data, these briefing docs in Dendreon’s case were actually mildly approving in spots. My expectations were met when the AC voted at the end of the day 17-0 for safety and 13-4 for efficacy. The stock price went from $5ish to nearly $13 the next day, and over the next month hit $25.
And the drug was not even approved yet! The AC vote means nothing – it is simply advisory. But the FDA had never, in the case of a terminal illness with few options, overridden an AC recommendation with rejection. Given my research, the potential market indicated that future sales even discounted back to present value, should yield a share price of around $40 to $50 very soon. Imagine that! Dendreon, within my IRA, was already nearly a quarter of a million dollars. I was having visions of paying off my house within a year from my brokerage account.
My wife started asking, “So when are you going to sell some?” My answer: “After approval.”
The rude awakening came when the FDA did say no, in the form of a Complete Response (or “approvable”) Letter, where the answer was: “Complete the ongoing trial and show us MORE proof”. The stock tumbled back to $7, and then to $5, and has bounced around since then. Me? I mostly got out around $6, as that ongoing trial wasn’t going to end until 2010. My wife still says, “I told you so,” occasionally.
So why dredge this up now? Dendreon amended their agreement on that ongoing trial and final results are now expected by April of this year. I’ve been building my position back up, as I still believe in the drug. However, given the market’s performance in the last year, and my promise to my wife to never concentrate our holdings quite so much again, I don’t have as many shares now as I did then. And I am revisiting my reasons for holding, AND my projected reasons for selling.
I still believe in Provenge. At the “interim” look at the data, it showed a 20% reduction in risk of death compared to the placebo group. In the prior trials, it showed a similar benefit at a similar time point… and later on an increasing benefit over time. There are extremely few and mild side effects, especially compared to the chemo alternative. But recall my second reason for investing – it made me feel “good”. I CANNOT allow myself anymore to use that as a reason for investing – biotech investors in particular are advised to “never fall in love with a stock”. So now that we are getting close to potential approval again, I have to decide when I will sell what percentage of my stake, and at what prices. I need this decided BEFOREHAND, so there is no emotion involved at the time. Note: I am fine with the risks of non-approval with the amount that I hold now! This decision is only for if approved.
My decision? I will sell a quarter of my holdings at $30, and another quarter of what I have remaining at $40. After that, when the company releases pricing and manufacturing capability, I’ll have more data to use to decide where to go from there. But my limit orders to sell are set, and honestly? I slept much better last night.
STOCK INVESTING IS NOT A GAME TO ME. I have a day job, two kids, and a wife who equates the stock market to a casino. Two years ago, I let myself accumulate just over 13,000 shares in a little biotech company called Dendreon. At a cost basis of about $4.50 a share, this $60K, spread between my IRA and brokerage account, was a SIGNIFICANT fraction of my assets – a much higher percentage than I, who pride myself on my personal finance knowledge, would ever recommend anyone investing in one risky stock.
Why did I do this? Lots of little reasons… but it boiled down to a couple reasons. I believed in the drug that was up for FDA approval, and it made me feel good to invest in something that has potential to save lives. (Provenge is an immunotherapeutic vaccine for prostate cancer)
Now, built into that “belief” was an enormous amount of due diligence. The final block of shares that I bought was after the FDA released the briefing docs that the Advisory Committee it had convened would be using to aid them in their discussion. Routinely negative and devoted to picking apart data, these briefing docs in Dendreon’s case were actually mildly approving in spots. My expectations were met when the AC voted at the end of the day 17-0 for safety and 13-4 for efficacy. The stock price went from $5ish to nearly $13 the next day, and over the next month hit $25.
And the drug was not even approved yet! The AC vote means nothing – it is simply advisory. But the FDA had never, in the case of a terminal illness with few options, overridden an AC recommendation with rejection. Given my research, the potential market indicated that future sales even discounted back to present value, should yield a share price of around $40 to $50 very soon. Imagine that! Dendreon, within my IRA, was already nearly a quarter of a million dollars. I was having visions of paying off my house within a year from my brokerage account.
My wife started asking, “So when are you going to sell some?” My answer: “After approval.”
The rude awakening came when the FDA did say no, in the form of a Complete Response (or “approvable”) Letter, where the answer was: “Complete the ongoing trial and show us MORE proof”. The stock tumbled back to $7, and then to $5, and has bounced around since then. Me? I mostly got out around $6, as that ongoing trial wasn’t going to end until 2010. My wife still says, “I told you so,” occasionally.
So why dredge this up now? Dendreon amended their agreement on that ongoing trial and final results are now expected by April of this year. I’ve been building my position back up, as I still believe in the drug. However, given the market’s performance in the last year, and my promise to my wife to never concentrate our holdings quite so much again, I don’t have as many shares now as I did then. And I am revisiting my reasons for holding, AND my projected reasons for selling.
I still believe in Provenge. At the “interim” look at the data, it showed a 20% reduction in risk of death compared to the placebo group. In the prior trials, it showed a similar benefit at a similar time point… and later on an increasing benefit over time. There are extremely few and mild side effects, especially compared to the chemo alternative. But recall my second reason for investing – it made me feel “good”. I CANNOT allow myself anymore to use that as a reason for investing – biotech investors in particular are advised to “never fall in love with a stock”. So now that we are getting close to potential approval again, I have to decide when I will sell what percentage of my stake, and at what prices. I need this decided BEFOREHAND, so there is no emotion involved at the time. Note: I am fine with the risks of non-approval with the amount that I hold now! This decision is only for if approved.
My decision? I will sell a quarter of my holdings at $30, and another quarter of what I have remaining at $40. After that, when the company releases pricing and manufacturing capability, I’ll have more data to use to decide where to go from there. But my limit orders to sell are set, and honestly? I slept much better last night.
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