Give a Grad a Drip
Open a world of opportunity in stocks

by Vince Hanks (TMFElwood)

NORTHVILLE, MI (April 22, 1999) -- In just a few short weeks, the Class of '99 will stand in unison, let out a hearty cheer, and toss their graduation caps wildly in the air as if there were no repercussions. It's a time of transition; an end and beginning at once, as thousands of students shed their commencement gowns and begin a journey most unfamiliar.

One thing that is certain is that the vast majority of the century's last graduating class will begin the next phase of their lives financially disadvantaged. The plain fact is that whether graduating from high school or college, as prepared as we might be for the next challenge, we have not been educated in personal finance; simply put, we haven't been taught to save money and avoid high-interest debt.

In fact, the contrary might be true. One of the frills of graduation is a commemorative greeting "card" from America's favorite uncle, the credit card company. "Buy now and pay later," is the message inscribed inside. It should instead read "buy now and pay forever."

It's not so surprising that with the ease of entry into debt and the lack of preparedness in personal finance, the average American carries a credit card balance of nearly $6,000 from month to month, at an average of 18% interest. That's $1,000 down the drain each year. Glub!

What can we Fools do to combat this trend? We can adapt the same tactics as Uncle Debty and hit 'em early. Teach saving and debt avoidance as early as possible, and when plausible, help establish the habit of saving regularly by introducing to our youth the most profitable savings vehicle of the twentieth century and the road to financial security and tranquility: common stocks.

At graduation time this year, instead of giving a set of luggage, a camera, or a Humvee, consider instead setting the new graduate up with a dividend reinvestment plan in one of our nation's leading corporations. Drips not only provide a method for investing with a very small amount of money upfront, they also encourage the Dripper to keep investing monthly (or as frequently as they can afford) in small amounts while avoiding brokerage commissions. Drips are the gift that keeps on giving, a perfect inauguration into personal finance for the '99 Grad.

How to give gifts of stock and/or Drips:

If you already own shares that you wish to gift, follow these three steps (the shares you wish to give must be in your name and not your broker's, or "street," name):

1. Secure a stock power form (a legal transfer form) from a broker or the company's transfer agent. Some can be downloaded from the transfer agent's website. If you're enrolled in the company's Drip, there is usually a transfer form on the back of your statements.

2. Fill out the stock power form (you will need the recipient's social security number) and take the form to a bank or broker to receive a medallion signature guarantee.

3. Once the form has been stamped with the medallion, return it, along with the stock certificate (if you're holding it) to the transfer agent with a letter of instruction explaining your wishes.

It's that simple and often costs little or nothing.

If you do not already own shares that you want to gift, you may wish to:

1. Look into Direct Purchase Plans (DSPs), in which you can buy shares directly from the company in the name of the recipient.

2. Use a Drip enrollment service to purchase shares for the individual.

3. Forget the whole thing and look into Humvee financing. Or maybe buy some shares from a broker and complete the first three steps above.

There are some accounting considerations for transferring stocks. When giving shares of stock, you must provide the recipient with three pieces of information.

1. Your tax basis (or cost) of the stock.

2. The fair market value (FMV) of the stock at the date of the transfer.

3. The amount of the gift tax you paid, if any.

These are important because the recipient's tax basis in the gifted stock will depend upon the donor's basis and the FMV at the date of the gift. The rules are as follows:

1. If the FMV of the stock is less than the donor's basis at the time of the gift:

A) The recipient's basis for gain is the same as the donor's adjusted basis.

B) The recipient's basis for loss is the FMV at the time of the gift.

2. If the FMV of the stock is more than the donor's basis at the time of the gift, then the recipient's basis is the same as the donor's basis.

One final note about giving gifts of stock: The recipient assumes not only the basis determined by the donor or the FMV, but also the donor's holding period. She could sell the stock one day after receiving it and it would still be a long-term capital gain as long as the donor held the stock for at least one year.

So, your mission, Fool, if you choose to accept it, is to alter the path of a new graduate this spring. Lead them away from the temptation of high-interest debt and into a world of opportunity with regular savings in stocks. Give a Grad a Drip!

If you have any questions or comments about gifts of stock or Drips in general, please visit the Drip message boards.

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4/22/99 Close

Stock  Close    Change
JNJ    102 1/2   +1 3/4
INTC   61 1/2    +3 1/16
CPB    43 11/16  -5/16
MEL    72        +15/16
         Day      Month    Year    History
Drip     2.72%    5.43%   5.74%     20.27% 
S&P 500  1.70%    5.63%   10.86%    44.67% 
Nasdaq   2.95%    4.06%   16.82%    60.72%  

Last Rec'd Total # Security  In At    Current
 02/01/99  8.092    CPB     $52.852   $43.688
 03/04/99  19.468   INTC    $40.130   $61.500
 03/09/99  9.076    JNJ     $74.910  $102.500
 03/08/99  6.977    MEL     $64.293   $72.000
Last Rec'd Total # Security  In At   Value  Change
 02/01/99  8.092    CPB     $427.68 $353.52 ($74.16)
 03/04/99  19.468   INTC    $781.24 $1197.27 $416.03 
 03/09/99  9.076    JNJ     $679.89 $930.29  $250.41 
 03/08/99  6.977    MEL     $448.56 $502.33  $53.77   

Base:  $2400.00
Cash:    $24.33**
Total: $3007.74

The Drip Portfolio has been divided into 100.036 shares with an average purchase price of $23.991 per share.

The portfolio began with $500 on July 28, 1997, adds $100 to invest every month, and the goal is to have $150,000 in stock by August of the year 2017. Due to the slow nature of dollar-cost-averaging, we don't expect to seriously challenge the S&P 500 for the first 3 to 5 years as we build an investment base. The long-term advantages of dollar-cost-averaging still overcome the short-term disadvantages, however.(NOTE: our investment in Campbell Soup is all but frozen due to fees instituted in its DRP.)

**Transactions in progress:
03/22/99: Sent $100 to buy more MEL.