Dividend reinvestment plans are slow boats to a portfolio

PERSONAL FINANCE

January 30, 2000|By Eileen Ambrose

JOHN LACEY is a walking advertisement for dividend reinvestment plans.

The Ellicott City retiree invests in 51 DRIPs, which allow him to buy stock directly from companies and automatically reinvest the dividends. By doing so, Lacey avoids paying hefty broker commissions.

But that's not the only reason Lacey is an advocate and tries to convert others, from grandchildren to friends and acquaintances, to DRIP investing.

"I can't make $500, or $1,000 or multiple thousand purchases often. I'm a small investor," the 70-year-old said. "Where else can I get a good return when I just put up $10 a month?"

DRIPs have been around since the late 1960s, and today more than 1,300 companies offer them. With the Internet, it's easier than ever to get information about plans. And new online brokerages are cropping up to provide DRIP-style investing without some of the drawbacks.

DRIPs typically require investors to buy at least one share, usually through a broker, before enrolling in the plans. A newer breed of DRIP, called a direct stock purchase plan, allow investors to buy even the first share from the company. About 600 plans offer this feature.

Do-it-yourself publishing

DRIPs are suited for do-it-yourself investors who don't trade often and like to buy small amounts of stock on a regular basis. Most plans require minimum investments of $50 to $250 on initial purchases and $25 to $100 on subsequent buys, said Chuck Carlson, editor of DRIP Investor Newsletter.

And, like mutual funds, DRIPs allow you to buy fractional shares. So, if you put $50 a month into a $200 stock, you can build a portfolio quarter-share by quarter-share.

"These programs allow you to really build an investment program based on your own financial restraints," Carlson said.

Slow to move

DRIPs have drawbacks, though. You can't make trades quickly, so you have less control over the price at which a stock is bought or sold. The plans buy stocks once a week, once a month or quarterly.

Most require investors to submit in writing a request to sell stock through the plan, so it may take five to 10 business days to complete a sale, Carlson said. More are offering telephone sales that can be done in 24 hours, he added.

Recordkeeping can be a hassle, too. Invest in 10 DRIPs and you'll get statements from 10 companies. And it's up to you to figure out the cost basis of stock and capital gains when you sell shares. That can be especially frustrating if you buy small amounts of stock at various prices and reinvest dividends over many years.

Lacey uses a computer spreadsheet and spends an hour a day on his bookkeeping. "You've got to be organized," he said.

Not all DRIPs are alike, so read prospectuses carefully. Although most DRIPs don't charge fees for purchases, some do, or require sizable initial investments.

For instance, McDonald's Corp. requires a minimum initial investment of $500, or $50 invested each month for 10 months. The plan charges a one-time setup fee of $5. For each additional cash purchase, investors pay $6. To sell, it costs $15 plus 15 cents per share.

A $5 purchase fee may seem small, particularly if you're making a $500 or $5,000 purchase. But if you're investing only $50 a month, "you'd be giving away 10 percent of your investment every time," warned Vita Nelson, editor of the Moneypaper, a monthly newsletter on DRIPs.

There are plenty of sources on the Internet about DRIP investing and plans. A good place to start is with DRIP Central at www.dripcentral.com. The site includes articles on DRIP investing and numerous links to other DRIP sites and resources.

Online enrolling

Netstock Direct, at www.netstockdirect.com, provides summaries of DRIP plans, allows you to view prospectuses online or e-mail companies for a copy. You can also enroll in some plans via Netstock.

Copies of prospectuses and enrollment materials can also be ordered through the Direct Purchase Plan Clearinghouse at www.enrolldirect.com or by calling 1-800-774-4117.

Two new online brokerages promise to provide the benefits of DRIP investing minus the disadvantages.

Both offer consolidated statements electronically, so you aren't dealing with multiple statements from different companies. They allow investors to buy full and fractional shares of major companies, even those that don't offer DRIPs, such as Microsoft Corp. And dividends are reinvested for free.

BuyandHold.com offers stock in about 1,300 companies and requires a $20 minimum investment. Each transaction costs $2.99 and investors must make five transactions per year. The brokerage buys and sells stock twice a day. "We want to give people flexibility in the market," said Peter Breen, chief executive officer.

BuyandHold.com, www.buyandhold.com, also will track investors average purchase price over time, which helps in figuring capital gains.

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