DRIPs offer a way to own stocks

Your Money

April 01, 2007|By Andrew Leckey | Andrew Leckey,Tribune Media Services

With price consciousness and diversification so vital to investors in an uncertain year, dividend-reinvestment plans fit right in.

DRIPs, as they are commonly called, are company-run plans that allow you to invest in a firm's stock with a modest initial outlay and continue to reinvest dividends to buy additional shares. You also can make additional purchases of shares from the company.

Of roughly 100 available DRIPs, about half permit you to buy your initial stock directly from the company with no broker needed. The rest generally ask that you initially buy stock from a broker to start out in their plans.

Low initial outlay and gradual buildup at fluctuating stock prices allows for dollar-cost averaging to smooth out risk. You can join additional DRIPs of other companies' stocks on your way to diversifying. Many companies boosted their dividend payouts in recent years, a plus for the growth of your holdings.

"A lot of people are jittery about this market, worried they'll be getting in at the top but still wanting to be in the market," said Vita Nelson, editor and publisher of The Moneypaper (which has a searchable DRIP directory at www.directinvesting.com) in Rye, N.Y. "With DRIPs, you can start out with very few shares and continually build your holdings at different price points in a volatile market."

Many investors are intrigued by the concept. Some individuals always will prefer stocks over mutual funds because they like to follow a company, though DRIP investing can't provide the diversity of a mutual fund owning dozens or hundreds of different stock names.

DRIPs require that you be a careful recordkeeper for tax purposes so you are aware of the cost basis, or original price, of stock holdings you're amassing. A few investors become carried away with DRIP fever, going far beyond building a portfolio to almost turning them into collectibles, too many of them virtually identical in characteristics.

"I tell investors they should buy three or four DRIP stocks first and see how they work for them, then continue to add new plans to the mix," said Charles Carlson, editor of the Hammond, Ind.-based DRIP Investor, which publishes an annual directory available for $14.95 at www.dripinvestor.com. "However, you don't want to get into 20 stocks in six months or acquire them like baseball cards, because you'll just wind up with too many stock names over time."

The DRIP offered by Bank of America Corp., the national and global bank holding company, is recommended by Carlson and Nelson. It offers a solid dividend and potential for price appreciation. The minimum initial investment is $1,000 (many plans require $250), with subsequent investments a $50 minimum.

Just as minimums for initial and subsequent purchases vary among DRIPs, so do fees. Most plans have an enrollment fee of $5 to $15 and purchase fees of $1 to $5, Carlson noted. Nonetheless, fees are competitive with the lowest fees charged by brokers, he said.

Some investors complain that their brokers don't offer much information or advice about DRIPs, because they don't receive commissions for them. On the other hand, the chief concern of some financial planners is that even a dozen DRIPs won't provide enough diversity in an individual's holdings. Investors always must consider other investments besides strictly dividend-producing shares, they contend, and DRIPs should therefore be a component, not the mainstay, of an individual's portfolio.

Remember, a DRIP is a handy and cost-effective way to invest in stocks. It is most important to study the merits of the underlying stock, no matter how attractive a DRIP's investment features may be. Don't select a DRIP only because it has no fees or has especially low fees.

If you become a DRIP investor, seek diversity in industries.

In the consumer area, Carlson recommends the DRIP of PepsiCo. Inc., a powerhouse in snacks besides cola, while Nelson prefers rival Coca-Cola Co. for its extensive international exposure.

In energy, Carlson suggests Exxon Mobil Corp., and Nelson likes BP PLC. Other favorite Carlson DRIPs that have low fees and allow you to buy directly from the issuing company include:

Emerson Electric Co., a maker of electric equipment and electronics.

Becton, Dickinson & Co., a medical technology company in supplies, devices and equipment.

Lockheed Martin Corp., a leader in technology systems and defense.

Other direct-purchase, low-fee DRIPs favored by Nelson include:

MDU Resources Group Inc., a large company that just bought Cascade Natural Gas.

International Paper Co., the biggest paper and forest-products firm, which is narrowing its focus on unbleached paper and boxes.

Paychex Inc., a provider of payroll and benefits services to small businesses.

Tennant Co., a small company that which makes floor-maintenance equipment.

Andrew Leckey writes for Tribune Media Services.

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