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Dividend Reinvestment Plans and Direct Stock Purchase Plans

Posted by Evolence , 02 June 2009 · 4,381 views

If you're interested in reading this, I'm going to make several assumptions about you. For one, you're probably not an institutional player in the market. For two, you're looking to save money on investments. And for three, you're probably looking to improve your financial outlook. With those assumptions in mind, I figured I'd post on dividend reinvestment plans (called DRP's or DRIP's) and on direct stock purchase plans (DSPP's). So first off, I figure we should start with just what exactly these plans are, what they're not, and how they might fit into your portfolio.

DRIP's and DSPP's are designed to promote low-cost ways to invest in companies over the long-term. A DRIP is a plan whereby which a stock owner registers their shares with a plan administrator, and then reinvests their dividend payments into common shares of stock. In this way, dividends act as a type of compounding interest, as more shares of stock are purchased which in turn produce more dividends, which then buy more shares of stock, etc. Many DRIP's allow for you to make optional cash purchases of additional shares of stock.

A DSPP is very similar to a DRIP, in that dividends can be reinvested into common shares of stock. The main difference is that a DSPP allows you to purchase your first shares of stock directly from the company (technically from the company's transfer agent) as opposed to buying them through a broker. Most DRIP's require that you buy your first shares through a broker and then transfer them to the DRIP plan administrator-- this usually involves at minimum a $50 fee through the broker. In this way, DSPP's can be a cheaper way to begin investing in stock, though many require minimal investments such as $250, $500, or $1,000.

Now let me be perfectly clear on what DRIP and DSPP's are not. These are not vehicles designed for short-term trading or sophisticated trading. There are often fees associated with joining a plan, and there are brokerage fees/commissions for selling shares. In this way, plans are very similar to owning stock shares through a broker; there are fees to buy and sell through brokers as well. Where DRIP and DSPP's excel is in offering cheaper ways of purchasing shares over time. However, you cannot time your purchases as you can in intra-day trading. Some plans purchase shares on set days of the week or month, and you get the weekly/monthly average price. This can be an advantage or disadvantage, depending on your perspective. Since trading through DRIP/DSPP's is less sophisticated, you can forget things like buying on margin, shorting, or trading options on the stock. If you want to engage in this type of trading, you'd better stick to a broker.

Another nuance of DRIP/DSPP's is that they involve fees. Some of these fees are minimal or company paid, but in some cases, they can actually cost more than using a discount broker. For instance, many plans have a brokerage fee/commission for making optional cash purchases. This fee can range from being company paid to costing $5 or more. While $5 is certainly not a hefty brokerage fee, you can trade stock through some discount brokers for prices as low as $3. With that in mind, you might be better buying some stock through a broker.

Finally, a lot of the value of a DRIP/DSPP depends on your financial situation. If you are young or middle-aged and looking to diversify your portfolio, these can be great ways to invest in stock, particularly if the plan is for a solid company that you think has good long-term investment prospects. If you are looking to invest in an IRA or retirement account, not all companies offer this ability; those that do typically charge an annual IRA maintenance fee (which will eat into your principal investment). A retirement investment might have more flexibility by being invested through a broker. Finally, if you are retired and an income investor, chances are, you are not as interested in increasing your stock holdings as you are interested in dividends, in this case, it may not make sense to reinvest your dividends. You might be better served by purchasing your stock through a broker and receiving cash dividends.

With these considerations on the table, I'll talk about some specific plans. For a plan to be considered it needs to meet several criteria in my mind. First of all, the plan needs to be low-cost, in other words, cheaper than the cheapest of discount brokers. Many plans have a set-up fee for initiation: This fee needs to be less than $20, preferrably less than $15. The ability to purchase more stock is important, this should be cheaper than through brokerages. Reinvesting dividends is an important aspect of these plans, dividends should be reinvested as cheaply as possible. Finally, it shouldn't cost too much to sell-out shares of your plan...This feature should preferrably cost $15 or less ($15 is fairly typical). With this in mind, let's look at some specific industries/plans:

Energy

--Exxon Mobil: XOM has a popular DSPP. Most of the purchase fees are paid by the company, so more of your money goes to work for you. The minimum initial purchase is $250, or a recurring investment schedule of $50. The minimum subsequent investment is $50.
--Chevron: Purchases cost a $2 fee, and dividends have a percentage fee assessed.
--Conoco Philips: A very cheap DSPP, similar to XOM's plan with most fees being company paid. The difference is that minimum investment amounts are half as much, with the amount being $25.

Industrials

Two plans I'm most familiar with are the General Electric and Caterpillar DSPP's through BNY Mellon. Both plans require a minimum initial investment of $250 and allow you to make electronic purchases for the low price of $1. 3M has a DRIP which allows optional cash purchases as low as $10; Dupont has a DSPP which allows for cash purchases for $3-- a bit expensive for my taste.

Health Care/Consumer Staples

Johnson and Johnson has a DRIP that allows you to make free optional cash purchases in amounts as low as $25. Pfizer has a cheap DSPP that requires a $500 initial cash purchase. Many other pharmaceutical companies have higher fees than I like for optional cash purchases.

Among food companies, Wells Fargo acts as the transfer agent for quite a few companies. Heinz is one of the cheapest plans out there, with all cash purchases being free. Many of the other companies require fees.

Cheap DSPP's

Domino's Pizza, Inc. allows you to start investing for just $65. Kelloggs requires only $50 to start investing. Several independent banks require $50 to $100 to get started.




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