DRIPping into the market

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