Question About Dividend Reinvestment Plans

[Shantanu]

I don't have much money to invest (probably under $1000). At this price range, transaction costs would negate any probable returns that I would get. I've heard dividend reinvestment plans are the way to go, because you buy stock directly from the company, and all dividends that are paid are reinvested into more stock for you. Does anyone have experience with this? Do you have to be enrolled in some sort of program to take advantage of it (like, with monthly or yearly fees)? Or do the fees end right after your initial purchase of stock from the company (if any)?

 

[woodie1]

I have some Emerson Electric stock from when I worked there. Here is how their reinvestment plan works - Every quarter the dividends are used to purchase more shares and the cost is paid by Emerson. At the end of the year there is an additional $.08 (4 X $.02) shown as taxable dividends which is my share of their cost to purchase the stock each quarter. It is a really good way for a small investor to invest.

 

[Hector13]

you can also try places like sharebuilder.com where they allow you to make montly investments in "baskets" of stocks (like you own ghetto mutual fund). I think they charge reasonable fees (seems like $12 a month), though I have never used them personally.

 

[burnedout]

Another good place for information is the NAIC

Netstock Direct has plan descriptions online. Free, but you must register. Use a "spam" e-mail account.

Drip Central also has useful information.

There are a number of direct plans out there. I've been investing in DRIPs for 20 years now. Keeping up with the dividends can be a pain come tax time. Capital gains, if you sell after a number of years, can also cause some frustration. However, if you stay organized, it is a breeze.

Does anyone have experience with this? Do you have to be enrolled in some sort of program to take advantage of it (like, with monthly or yearly fees)? Or do the fees end right after your initial purchase of stock from the company (if any)?

To answer your questions: On some plans, you must purchase the first share through either a broker, Sharebuilder, or the NAIC. Other plans are direct investment. Some plans have investment and dividend reinvestment fees. For example, I started in with Upjohn which was outstanding and had no fees. When they became Pharmacia-Upjohn, they charged a really high reinvestment fee on dividends. I said screw that, took the dividend checks directly and invested the dividends in other companies. Other companies like National City Corp, who I've been with for many years, have no fees. Also look around. Some plans allow you to reinvest dividends at like 3 percent discount.

 

[FeathersMcGraw]

Originally posted by: Shantanu
I've heard dividend reinvestment plans are the way to go, because you buy stock directly from the company, and all dividends that are paid are reinvested into more stock for you. Does anyone have experience with this? Do you have to be enrolled in some sort of program to take advantage of it (like, with monthly or yearly fees)? Or do the fees end right after your initial purchase of stock from the company (if any)?

It likely depends on the plan. I used to work for IBM and participated in a stock purchase plan as an employee. Now that I am employed elsewhere, I am just a "normal" IBM shareholder, but still participate in a DRIP. Shares are purchased at par (I can't remember when the price is established -- at dividend issuance, or whether they have some sort of computed trailing average). Fractional share purchases are recorded, and there are no purchase or redemption fees (I can't remember if there was a nominal annual charge, something like $1).

The only real downside to a DRIP with a low initial investment is potentially high share costs which translate to low dividend yields, and therefore slow growth via reinvestment, unless you supplement the DRIP with additional funds from time to time.

I think most mutual funds should also allow automatic reinvestment of dividends and capital gains distributions. Personally, this is the way I'd go if you have a small investment seed, since NAV prices tend to be lower and you'll get some benefit from diversification over an individual equity. And particularly if you find a good no-load index fund.

 

[Aceshigh]

Intel has a very good DRIP plan. That was how I started investing actually. Many years ago I bought 1 share of INTC stock framed to put on my wall. That 1 share enabled me to participate in their DRIP plan. I gradually started building up my equity over the years, and by the time my holdings reached a decent amount, I withdrew from the DRIP and folded my Intel stock into my brokerage account.

 

[GasX]

Open an account at an online brokerage and buy an index fund.