A few months ago I mentioned I was looking into dividend investing as part of my financial freedom plan. Soon thereafter a reader offered to do a guest post on how he has set up his dividend investing plans. This added a practical take on my initial theory.
Today we have another reader who is offering his experience with dividend stocks, this time how he has used DRiPs to invest in dividend-producing stocks. Don’t know what DRiPs are? You will after this post. 🙂
Introduction
If you have ever wanted to invest in one stock but do not want to have to operate and maintain a brokerage account, wanted to have your dividends reinvested for you automatically or just want to buy and hold a good paying dividend stock, Dividend Reinvestment Plans might be a good option for you.
Dividend Reinvestment Plans (DRiP’s) are direct investment plans with a major company traded on a stock exchange and usually offer dividends and an option of reinvesting those dividends right away.
Wikipedia offers a good, basic explanation.
What this definition means is if I am a stock holder I can enroll in a DRiP plan with the company and I can have all my dividends reinvested, make additional cash purchase, set up automatic investing, buy, sell and even have the dividends paid out as an income stream. I can establish all this without a brokerage account, deal directly with the company’s transfer agent and have all these options.
If there is a stock on any US stock exchange it could have a DRiP plan. We are not just talking stocks that are household names like Exxon, Procter and Gamble, and Kraft but all stocks including REITS or Real Estate Investment Trust stocks and ADR or American Depository Receipts which is a foreign company tendering their stock on a USA stock exchange. Nokia, Toyota and Honda are good examples of foreign based companies and could have ADR. Utilities are usually are good payers of dividends and usually have DRIP’s.
Companies that I could not find that offer DRiPs are the explosive growth stocks like Apple and Google or Alphabet. Privately held companies that do not offer a listing on a stock exchange will not off a DRiP as no public investors are allowed. Lego is a privately held company so no DRiP. So not all companies offer DRIP’s.
There are good and bad aspects of every investment. I am about to point out some of these about DRiPs. As you will see I am not a salesman in that I will definitely tell you some of the benefits some of and the drawbacks up front. That way if you can see if this really fits what you want to do in your investment portfolio.
The Good about DRiP’s
1. Eliminate the need for a brokerage account required to buy a stock. You are not charged a monthly fee to maintain a brokerage account with no transactions.
2. Directly invest with a company’s transfer agent and start buy stock for a minimum required price and invest in small increments of money as little as $25 a month depending on the plan up to the plans maximum which can be in the six figure range.
3. Retain the stock certificate and act as your broker (the transfer agent) of your stock so you don’t have to hold the stock certificate.
4. This can be a good option for someone who wants to buy and hold for a long time only a few stocks or many stocks.
5. Reinvest automatically to build the account quicker or have dividends paid out to you if you are looking for an income stream. You have that option and can change this option any time.
6. Help you keep track of the dividends paid out and offer necessary information for IRS reporting and filings to of 1009 to the IRS
The Bad about DRiP’s
1. All plans are not the same. Some have fees, rules and restrictions while others plans may pay these fees. If you are investing in a stock that has high fees then it may not be worth it to you. Later I will explain how to look up companies, find if they have a DRiP plan, How to find the transfer agent and how to look at the plan and what fees to look for. But right now I am giving the global picture.
2. You are dealing with a plan that is defined by the company and that plan can change. They can cut or eliminate dividends, add fees or even eliminate the plan.
3. Automatic payments are available just like mutual funds but they are usually executed on that day as defined. In addition you typically can only sell once a month without incurring fees. Now just looking at these plans there are market order selling which you would need to read know and understand how this works but it is an extra fee.
4. Seeing that you are dealing with an individual stock the price can go up and the price can go down. With only investing or selling once a month you might be buy high and selling low. This is limiting whereas an online brokerage account you can execute a buy or a sell to maximize gains or minimize losses. However if you are a buy and hold investor you don’t need this feature. I would never consider a DRiP’s if you are a day trader or a panic seller.
5. As with all investments there is work involved. If you invest in real estate there is work involved with managing or conversing with managers of your property. DRiPs require you to find a company, keep track of a company, changes in the plan and is it still meeting your need. If you own mutual funds there is work involved in re-balancing but finding and managing the company’s progress is done for you.
I would say this is more work than investing in a mutual fund but probably less work than investing in real estate. So don’t think this is as simple and record keep is a must.
The Ugly about DRiP’s
DRiPs used to be ugly housekeeping of keeping track of what is bought. If you buy 100 shares at $10 a share and keep the dividends and it appreciates to $12 a share the calculation of the cost basis is simpler than with a DRIP where the cost basis is “varies”. It is one thing to buy 100 shares at $10 a share and different if it is 100 shares acquired over years. There was tracking software back 6 years ago and there probably is now but I have not researched this yet as I am not currently back in the game.
I have found that the transfer agent now is required to report a cost basis to the IRS so there is probably a simpler way now however I cannot fully report on this as I have not done this since they instituted this IRS requirement. It could be easier now. It is best to consult a tax adviser before investing or read the link further down in the article about cost basis.
Personal Experience
I got exposed to DRiP’s after college when my mom joined an investment club and they used a service that taught them about DRIPS. I read the material and figured that I could do this on my own so I did. My big winner was when I was just out of college and started to invest. One of my DRIPS was Cheeseborough/Ponds. I don’t remember all the particulars 30 years ago but the company was involved with a leverage buyout or LBO and my simple $400 investment was bought out for $1100. I just made $700 profit in a matter of 9 months and I wanted to learn more. Well I learned that was like winning the lottery in that was a rare and special case. I really did not know what I was doing but I had one heck of a profit at such a young age made me believe that there is something to this way of investing and needed to investigate more.
I continued to learn about DRiPs and used them. I had success and failures. Seeing my $3500 investment in Intel balloon up to $20,000 and then popping to $5000 in the dot.com bust was quite a unique experience. However I did not lose with Intel as I could not invest more at the time of the insane run up so I did not invest much at the high at that time.
When I got married and started to have kids I found it a tool to invest and save the little bits of money and invest in major stocks. Kids are expensive so I did not have thousands to work with and the thought that I have 18 years to save for college why not invest in blue chip stocks. This was my method. I also investing in a 529 plan but not all of my money. It seemed that whenever the kids wanted to eat they wanted McDonald’s. I looked at McDonald’s and it had some very good finances at the time. The kids loved Frito’s, Doritos and Pepsi. Pepsico owned all those. We used Colgate kids toothpaste and regular Colgate and used Palmolive soap to wash our dishes. Colgate/Palmolive was added.
Our company bought computers and the only ones they would buy were Intel. Let’s add Intel to the portfolio. At the time it was look at what you consume and invest in what you know. I believe this had to do with some sort of Warren Buffet quote in that he invested in things he understood. I sold my whole portfolio about 6 years ago to utilize in my son’s college education. There was around $30,000 total and each DRIP earned some profit. More than others. Had I devoted more time into analyzing and keeping track It might have been higher but the lowest was the equivalent to a 4% annual return while my greatest was around 7% annual return. Do I find myself as an expert? No I am an architect my training and investing is my hobby. Back then I was investing more along the lines of “Even a blind squirrel will find a nut.” But I did learn a lot back then and I still need to learn more.
How to Invest in DRiP’s
Part of the process is finding if a company that you want to invest in and then finding out if it has a DRiP and how you can invest. Now I am not going to tell you the first part of how to finds a company to invest in but I am going to tell you how to find out if there is a DRiP available for that company.
This is done by accessing the corporate website and what you are looking for is “investor relations” “Shareholders services” or some other similar heading. Select this and typically you are looking for something like direct investing or DRiP or something similar. Now this usually is a brief description of the plan and typically has a link to the transfer agent. The transfer agent is the holder and keeper of the plan and who you will deal with directly in order to purchase shares. The website will tell all the minimums required to invest for that particular stock. When you look at this you will notice that all plans are not the same. Some have higher or lower minimum requirements, the plan may have fees associated with the purchase of that stock or the company may pay for those fees which is the better of the plans. This is more of your money going into the plan.
I have included an example link to a well-known stock. Now it’s disclaimer time in that I use to own this stock 6 years ago, it had a good track record back then. I am not endorsing this stock and I am not a current owner of this stock but once was an owner. All links shown are for example only. You need to read, research, evaluate and understand the company you want to invest in.
On this web page there is a how to buy stock. This is administered through Computershare which will take you off the main website to here.
Then you are looking for the plan summary. This will tell you the minimum amount to purchase and other options. There is a maximum amount you can purchase in a year but this is usually quite high for the average investor.
Now the biggest thing is looking at this stock are the fees and this can change over time as this stock did not charge all these fees 6 years ago. A very good example of how a plan can change.
- Initial Setup Fee $5.00
- Cash Purchase Fee $6.00
- Ongoing Automatic Investment Fee $1.50
All these fees can eat away at your investment so it is important to read know and understand what fees are charged and what fees are not charged. The current viewing of this link there are fees that you would be charge each time you invest so if you are a trickle investor this might not be a good DRiP for that type of investment style but if you can make a lump sum it might not be as painful. You need to do the math and know and understand the fees you will be charged for a plan. I will not explain all the other fees of Batch sale fee, Market order sale fee, market order max sales fee as I never used these features but I am sure a Google search would tell you more.
Now compare the fees charge to another large corporation and once again I am not endorsing this company and this is being used for illustration purposes only.
As you can see the fees are quite different in that this plan pays for most of these fees while the other does not. This can be huge for the bottom line. There are resources that will tell you the low or no fee DRiPs out there and one I have used in the past was Direct Investing or The Money Paper.
The Tax Man Cometh
Dividends are taxed as income. You will receive a 1099 and some are a little more complex like REITS or ADR’s in the 1099 due to how they are governed but it is a matter of filling in the information in on the 1099 in the proper location in a tax program or your accountant can download this information.
As of 2010 there is information reported to the IRS for cost basis. In its simplest explanation it is the cost of the security when bought to determine if there is a capital gain or loss on the security when it is sold. This is a new feature since I last invested and probably makes it easier but I have not had to sell a security under these new rules but you tax adviser would know what to do. Here is a link to the Computershare tax information center that explains this better than I ever could.
Resources
A Google search of “stock transfer agent directory” you will see different companies that are transfer agents for companies. You just need to find out which transfer agent is handling the stock you are looking at. Here are two of the larger players in the market and there are others too:
There are other resources out there that have a wealth of information available that can help point you in a better directions. One service that I used in the past was Direct Investing and enjoyed there newsletter. I am sure there are others out there along with blogs if you are interested in learning more about DRiPs.
Rarely do I see a blog or article talking about DRiPs and how to use them. I find them a interesting tool in investing in individual stocks. Even though this is just a brief explanation of a personal experience with DRiP’s and I did like working with them in the past. The biggest thing I learned was educating myself on an individual stock.
As I am starting on a new phase in my life now that I have one of my son’s out of college and the other is ½ way done I will start looking at investing in different ways and one of them is getting back into DRIP’s and dividend paying stocks. One thing is looking for that potential income stream in retirement through dividend paying stocks. I find that a when I was investing in DRIP’s it was a good way to invest in a more focused fashion with small amounts of money and was only a part of a diverse portfolio.
One type of stock I want to investigate more are REIT’s (Real Estate Investment Trusts) as it might be a good diversification portion in my portfolio as it is a stock that is Real Estate without being a landlord. I also want to relearn and investigate more of how to find those good paying dividend stock that will also grow similar to the ones I had 6 years ago and how to better manage them.
I hope you have found DRiPs to be interesting alternative way to invest in an individual stock.
Jon says
Thanks for the overview on DRIPs. I had previously invested a few thousand in DRIPs but cashed out several years back. If I recall, it was ExxonMobile, J&J and an auto parts distributor. All had a long history of increasing dividends and I made sure they were all through the same transfer agent – ComputerShare – for ease of tracking.
It worked out well for me and I would recommend it as a relatively slow & steady approach to build a passive income stream over time. This article was a good reminder that maybe I should start looking at them again! Thanks for sharing.
Coopersmith says
It is an option people do not know about.
Mike H says
DRIP’s are fine for the more passive investor. I prefer to pool all my dividends and manually select where to invest this capital based on valuations for key businesses on my watch list. If an existing position is fairly or attractively valued I’ll reinvest there as well.
-Mike
Coopersmith says
Agreed. Yet this is an option that most people do not know that is available to them, especially a new begining investor who is looking for a cheap way to get started.