How Do You Invest In A DRIP?

Ok so your interested in DRIPs - sounds like it might be a cheaper way to buy investments. Here my advice on how to make them work for you.
What are DRIPs?

1) Don't invest in a DRIP; figure out what your investing in and then see if the DRIP is right for you
If your the type of investor who likes to buy an investment, add to that investment periodically or revinvest the dividends for a long period of time then a DRIP maybe for you. However, don't decide you want a DRIP and then try and figure out what publicly traded company offers a DRIP plan you can invest in.

Decide where you want to make an investment. If its a pubicly traded company, go to the company's website and look for info on Shareholder Services on their Investor Relations pages. If they offer a company-sponsored DRIP, they will provide information about it here.

2) How do I get the one share of stock that some company-sponsored DRIPs require?
Some company-sponsored DRIPs don't even allow you to make an initial purchase of stock from the plan. Look at the company-sponsored DRIP prospectus to see if it allows you to make an initial investment or requires 1 share to get started.

For those DRIPs that require 1 share, you have to get at least 1 share from somewhere else. If you don't already own the stock in certificate form or don't have a friend/relative that will "gift" you a share of stock then the DRIP probably doesn't make sense as a holding vehicle for you.

For instance, you could buy 1 share of stock through Sharebuilder for $4, but then it costs $30 to get the stock issued in certificate form and then you can open the company-sponsored DRIP. As a result you real cost just to open the DRIP is $34, probably more expensive than just holding your entire investment in Sharebuilder or other brokerage account.

I have had friends and family who already participate in a DRIP that I wanted to open. I had them "gift" me 2 shares of stock so that I have the shares to open the DRIP account, this work well as long as you can find someone who is willing to do this for you. It is a bit of effort for both you and the gifter.

3) Don't assume the company-sponsored DRIP is the best holding vehicle
There is lots of considerations such as how long you plan on holding the investment, how often do you plan to make investments, do you plan to reinvest dividends, etc. Look at various brokerage account (including Sharebuilder) to see if a brokerage account or the DRIP will likely provide you with the lowest total cost of ownership throughout the investment.

See this previous article comparing some DRIP plans to Sharebuilder for more info.

4) Signing up for the DRIP
Once you have decided the DRIP is the right holding vehicle for you the account is fairly easy to open. You usually can either request the paperwork needed, or fill out the forms on the DRIP administrators web site to open the account.

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Comments (7)

For total cost of ownership, there are other ways of doing investing in DRIPs.

With a little extra legwork, you can lower your marginal costs by purchasing no-fee shares via the company, and consolidating at a brokerage such as FirstShare.

Matt, what do you mean? Are you saying you would do this for plans that have dividend reinvestment fees?

Thats the time I would think this makes sense. Make an investment through a company DRIP (with little to no purchase fees, but has dividend reinvestment fees) and then transfer the shares to a brokerage that offers free dividend reinvestment.

Although your net gain by doing this would be ~$4 (Sharebuilder) or whatever the purchase fee would be at a low cost brokerage.

DRIPs are not a hot topic like ETFs, but they can be a great investment if you find the right stock with the right program.

Plans I participate in:

Duke Energy, Bank of America, Pfizer, Altria, BB&T, ConAgra, Abbott, Johnson & Johnson, P&G, Anhueser Busch and a few others.

With the exception of Altria ($5+.03/share) and P&G ($2.50) all the plans are fee free and most offer electronic optional cash purchases. So instead of paying a fee to invest, all my funds go directly to stock purchase, no bleeding off $4.00/transaction or $12.00/month. J&J and Coke have a $1.00 fee for electronic recurring - so I just send them a check (cost .39 for the stamp).

Altria and P&G are also the only ones that have a fee for reinvesting dividends. And Aqua America actually provides a 5% discount on shares purchased with my reinvested dividends.

One of my key things is this: none of the plans charge for issuing a certificate. Why this matters to me is this --- almost universally the plans charge a high fee to sell. Usually around $15+.xx/share. So even though I am a buy and hold person, it affects the amount of return if I decide I want to go in a different direction investment-wise.

So once a quarter, or whenever I get a sufficient number of shares across my plans, I will send them a request for certificates. Bundle them all up into one Express Mail envelope ($10-12) and send them to Firstrade.

At Firstrade I am able to consolidate a majority of my holdings into one place. My dividends are reinvested at no cost, even on fractional shares. If I decide to sell I can do it when and at what price I want for $6.95/transaction. I only have to go to one place to see the bulk of my holdings. If I want to buy more I can buy anytime, not just lunchtime on a Tuesday.

It may be a little more labor intensive, but I also find that it helps me keep on top of exactly what I have and where. The process may not work for everyone, but it works pretty well for me. And once I get to certain spots with my dividend income, I may choose to stop reinvesting in companies I own, and possibly just save up to purchase new stocks. But I'll cross that bridge one of these days.

One issue I find with DRIPS is keeping track of the cost basis. The quarterly reinvestment and purchase of fractional shares makes record keeping a high maintenance task. Not an issue if you never plan to sell:-)

Thanks for a great post on DRIPs - this answered a lot of my basic questions. :)

Good site.

Have you connected with the DRIP community?

It's all of us who fled the FOOL when the fees were added.


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