Reinvestment plans let you buy stocks without a broker

INVESTING, DRIP BY DRIP

November 05, 1991|By Michael Pollick

Psst! Got a great deal -- you can buy this blue chip stock, see, and pay only 8 cents a share commission. And after that, you can buy as much stock as you want with no commission at all, and then, when you're ready to sell, they take care of that for

you, too.

Don't believe it? Just call Procter & Gamble's shareholder services department at 1-800-742-6253 and ask them about their Dividend Reinvestment Plan, or DRIP.

"People who aren't familiar with DRIPs are going to be amazed at the companies they can actually buy," said Charles B. Wilson, editor of Dow Theory Forecasts and author of a new McGraw-Hill book, "Buying Stocks Without a Broker," that describes and rates more than 900 DRIPs.

DRIPs, which almost always let you buy stock with fresh cash of your own as well as reinvest dividends, "provide a way for every investor regardless of how much money he has to participate in top-notch, quality stocks," Mr. Wilson said.

There's something in it for the companies that offer DRIPs too. Even though it costs the company, Giant Food Senior Vice President David Sykes feels it is worth it. "Our shareholders did ask to have this. They like to have the money working for them as quickly as possible."

While Giant and most other companies have to buy their own corporate stock in the open market to shovel into the DRIP, this is not always the case.

It is a fairly common practice for utility companies, for example, to sell newly issued stock through their dividend reinvestment plan, which has the effect of raising new capital.

Baltimore Gas and Electric Co. has raised about $25 million a year for the past three and a half years by selling new stock to the 23,500 shareholders in its dividend reinvestment plan, said Jeff Davis, director of investor services at the utility company.

While the proceeds do not supply all the fresh working capital the utility needs, Mr. Davis said, "It does help. It does make a

dent."

One of Mr. Wilson's favorite DRIPs is P&G's. It is nearly unique in that you can make your first stock purchase through the company. With most other companies, you have to own at least one share before you sign up for the DRIP.

The commission on one $80 share of stock is $20 at one brokerage house, Merrill Lynch. You would tell the broker to register the stock in your name. Once your target corporation is informed of your transaction by your broker, which might take three weeks or more, you can apply for dividend reinvestment.

Indeed, this can be one of the main drawbacks of the DRIP -- the time lag in setting up the account.

But after that first buy, you are home free. While the rules vary with each company's plan, you can typically spend as little or as much as you want to accumulate stock in the plan gradually, and the company will give you credit for fractional shares as well. Some plans will even sell your stock for you and send you the cash, although this is not typical.

For investing in about 80 large companies, there is a way around that initial long delay. Join the National Association of Investors Corp. for $32 a year. NAIC, based in Royal Oak, Mich., has made arrangements to get you onto the company's DRIP books quickly and without paying a commission, by piggybacking onto an account already set up by NAIC. You make your initial purchase of a given company's stock through NAIC's account. Once that is done, your own account will be set up for you, and you'll deal directly with the DRIP's transfer agent.

NAIC charges a one-time fee of $5 for each stock you wish to buy.

"If they just want to purchase one stock, they're just as well off to go to a broker," said Thomas O'Hara, chairman of the board of trustees of this 140,00-member organization. "If they want to buy stock in more than one company, we can save them a lot of money."

If you are interested in a dividend-paying company that does not offer a reinvestment plan, you might want to use Merrill Lynch's program, called Blueprint. You would leave the stock at Merrill Lynch, sign up for Blueprint, and the brokerage would reinvest all dividends for you automatically, giving you credit for fractions of shares, just as the company-sponsored dividend reinvestment plans do. However, you would have to pay Merrill Lynch a commission -- 4 percent on dividends of $100 or less.

For the investor, though, the cheapest deal in town is doing business directly with the DRIP.

Because of the goodwill it creates and the stability it gives the company's stock, the company is absorbing some costs just to keep you around. Mr. O'Hara estimates the cost at $20 to $25 per account per year.

DRIPs may be as close as you can get to a free lunch in the investment world. But you still have to pay taxes on those dividends, and eventually, on all that stock you're racking up.

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