Popularity of 'Drips' may bring higher fees

STAYING AHEAD

January 30, 1994|By Jane Bryant Quinn | Jane Bryant Quinn,1994, Washington Post Writers Group

NEW YORK -- Calling all Drippers, calling all Drippers. Your dedication to the tightwad "Drip" way of stock investing saves you so much money that thousands are following in your tracks.

As you gather adherents, you're generating an industry. More companies want to sell you shares, more Drip plans offer easy ways to buy, more publishers are cranking out newsletters and Drip directories.

That's the bright side. On the dark side, the more passion you show for Drip investing, the freer the companies may feel to start charging higher fees.

A Drip is a dividend reinvestment plan, now offered to individual stock investors by about 900 American corporations as well as a handful of foreign ones that trade on the U.S. exchanges.

Plan members can have part or all of their dividends reinvested automatically in new company shares. For this service, you usually pay little or nothing.

Nearly 100 companies even offer you a discount. Shares purchased with reinvested dividends may cost 3 percent to 5 percent less than the market price, and sometimes as much as 10 percent less.

Besides reinvesting dividends, you might also be able to buy company shares for cash.

Each plan sets different limits. A typical minimum: $10 to $50 a month. Maximums range from $12,000 a year to as much as $200,000 a year. A few companies even offer discounts on cash purchases.

A small but growing number also offer individual retirement accounts.

If you do have to pay transaction costs, they're much less than stockbrokers normally charge. Service fees might run $5 to $10 per transaction; any brokerage commissions are deducted at the low institutional rate. Even these costs are high, however, if you only reinvest small dividends. Drips work best for people who also buy extra shares regularly for cash.

Why do companies start Drip plans? Some want to attract more individual long-term investors. Some -- especially banks and utilities -- are trying to encourage their retail customers to become shareholders.

Some see Drips as a cheap way of raising money. They can sell new shares to Drip-plan investors without the expense of floating a big stock issue on Wall Street.

A few companies sell shares to investors who aren't even Drip plan members. Occasionally, limitations apply. But try American Recreation Centers (916-852-8005), Atmos Energy Corp. (800-382-8667), Dial (formerly Greyhound, 800-453-2235), Exxon Corp. (800-252-1800), Johnson Controls (414-228-2363) and Texaco (800-283-9785).

call these no-load [no sales charge] stocks," Charles Carlson, author of "Buying Stocks Without a Broker," told my associate, Louise Nameth. He expects dramatic growth in their number over the next couple of years.

Mr. Carlson's book, plus a newsletter called the Drip Investor and his directory of Drip plans cost $59; call 219-931-6480. The directory alone costs $15.95.

A downside to Drip investing is income taxes, which can be an administrative mess. All your dividends are taxable, even though they're automatically reinvested. If you buy at a discount, the value of the discount is taxable, too. So is the service fee and brokerage commission, if the company pays them for you. (If you itemize on your tax return, service fees qualify as a miscellaneous deduction.) Each of your Drip plans will report all this income to you annually, on a Form 1099.

Taxes really get hairy when you sell. To figure your profit, you must calculate the tax cost of the shares you bought, including fractions of shares that were credited to your account. You also add back any brokerage charges that you paid taxes on already.

Drip plans make no sense for investors who want to trade shares as the market changes. You can buy new shares only at certain times, and it can take 10 days or more to sell. You might get the price for a certain date or an average price over several days.

Lately, some Drips also have been increasing their fees. Bristol-Myers Squibb, for example, now charges 4 percent to reinvest dividends (up to a $5 cap), 4 percent on cash purchases (capped at $25), $15 to sell shares and other fees. That's still less than most stockbrokers charge but far from the tightwad Drip ideal.

Other companies also are adding fees. If they matter to you, check out all the costs in a Drip directory.

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