Drip Portfolio Benefits of Direct Investing

Many investors don't know the many benefits of direct investing, including commission-free purchases of even fractional shares of stock. Low-cost direct investing plans are great vehicles for building long-term wealth even if you have only a little money to start. We outline some details of the plans and how to get goin'. (Portions of this column were originally published in April 1999.)

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By Jeff Fischer (TMF Jeff)
October 18, 2001

For the many readers who are new to The Motley Fool each month and new to the great potential of direct investing, today we're giving a rundown of the two types of direct investment plans sponsored by companies. They are:

Dividend Reinvestment Plans (DRPs, or as we call them, Drips)

and...

Direct Stock Plans (DSPs)

The benefits offered by direct investment plans that we're interested in include the ability to:

  • Invest small to large amounts of money on a regular basis without a broker
  • Avoid commissions and other costs
  • Reinvest dividends in more stock free of charge
  • Invest the same amount monthly automatically if you wish, thereby buying more shares when prices are lower, and less when they're higher (as a result, you don't fret the stock market's volatility)
  • Vary your investment amounts monthly if you prefer, or don't invest at all when you wish
  • Diversify your portfolio even with very little money
  • Sell shares readily

Dividend reinvestment plans, or Drips, outnumber direct stock plans (which are also called direct initial purchase plans, or DIPs). Some 1,300 companies offer dividend reinvestment plans while about 500 companies provide direct stock plans.

Both plans allow you to purchase shares of stock directly from a company in amounts that can range from $10 per month to virtually unlimited amounts and almost all plans allow dividend payments to be reinvested in more stock, most free of charge.

The only cost with a majority of these plans is a one-time startup fee that averages between $15 to $30, and a similar fee to sell stock. Usually, all of these plans are administered through a transfer agent. A transfer agent is a financial firm, such as a bank, that handles the plan's transactions and record keeping. You only need to be aware of transfer agents because they're the entities that you usually transact with when using direct investment plans, even though it may seem as if you're dealing directly with the companies in which you're investing.

Usually it is an established, dividend-paying company that offers either type of direct investment plan.

So, what are the few differences between the two types of plans? They're slight and are mainly encountered at the outset.

To enroll in a company's dividend reinvestment plan, or Drip, you almost always must be a registered owner of at least one share of the company's stock. In contrast, to enroll in a direct stock purchase plan, or DSP, you can begin to purchase shares directly from the company immediately, but usually you need to start with about $250 rather than just one share. It's that simple: You typically must own at least one share of a company's stock to enroll in its Drip, but you needn't be a shareholder to begin most DSPs. Once you begin, both plans are very similar in function and in purpose.

While it's important to understand the differences between plans, it isn't necessary to dwell on the differences. A company will either offer a dividend reinvestment plan or a direct stock plan, but you should decide where to invest based on a company's business merits, not on the plan that it offers. As long as they are fee-friendly (meaning no costs to buy more shares or reinvest), the plans are equally beneficial, no matter what startup quirks they may have.

What's more important is that you start to invest sooner rather than later, but in the same breath, don't rush your decisions.

Getting started
You should consider direct investment plans when you want to build wealth over time by investing regularly in whatever dollar amounts you can afford while buying companies that you understand and respect and keeping costs as low as possible. Direct investment plans allow you to invest in this fashion at very little cost.

The Motley Fool's book, Investing Without a Silver Spoon, explains the ins and outs of direct investing, how you can build wealth over time, what to seek in a company and in building your portfolio, as well as taxes with the plans, accounting for Drips and more. You can grab the book in FoolMart or on Amazon (both stores offer customer reviews of the book), among other places. The book also makes a great gift for young people just starting out.

Finally, www.netstockdirect.com and www.moneypaper.com offer lists of companies with direct plans that you can peruse right now, and offer ways to open plans, too. If the companies you want to buy in a direct purchase fashion do not offer a plan (like most Nasdaq stocks), consider ShareBuilder and BUYandHOLD as two low cost pseudo-Drip options. Just read about the fees closely.

A stock market rife with uncertainty and downdrafts is, ironically, the most promising sort of stock market to start investing in for the long haul. Best wishes if you're starting now with direct plans. Visit us on the discussion boards (linked above to the right) if you have questions.

P.S. This week's earnings results for Intel (Nasdaq: INTC) and J&J (NYSE: JNJ) were covered by Mike Trigg in the Rule Maker.

Jeff Fischer owns the stocks in the Drip Port and not too much else in the world -- who needs it! The Motley Fool has a full disclosure policy.

Drip Portfolio

We are currently changing providers for our portfolio data. During the transition, we won't be able to show updates of our overall returns, though we will present daily returns. Thank you for your patience.
 Ticker Company Price
 Change
 Daily Price
 % Change
 Price 
 MEL MELLON FINL CORP 0.17 0.53% 32.07 
 PEP PEPSICO, INC. (0.61) (1.27%) 47.55 
 JNJ JOHNSON & JOHNSON 0.31 0.54% 58.08 
 INTC INTEL CORPORATION (0.52) (2.12%) 24.05 
 CPB CAMPBELL SOUP COMPANY (0.1) (0.36%) 27.50 
      
 Trade Date # Shares Ticker Cost/Share Price  Total % Ret  
10/07/98 40.2812 MEL 35.58 32.07  -7.22%
07/28/00 12.7329 PEP 46.61 47.55  4.75%
11/14/97 35.958 JNJ 40.81 58.08  47.14%
09/08/97 55.9666 INTC 25.10 24.05  4.94%
04/13/98 8.646 CPB 53.35 27.50  -45.58%
      
 Trade Date # Shares Ticker Total Cost Current Value  Total Gain  
10/07/98 40.2812 MEL 1,433.06 1,291.82  -141.24 
07/28/00 12.7329 PEP 593.53 605.44  11.91 
11/14/97 35.958 JNJ 1,467.59 2,088.45  620.88 
09/08/97 55.9666 INTC 1,404.68 1,346.02  -58.67 
04/13/98 8.646 CPB 461.25 237.79  -223.49 
Cash:200.00 
Total:5,769.52 


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Key
• S&P 500 (DA) = dividend adjusted. Dividends have been added to the total return of the index.

Note
Drip Port launched with $500 on July 28, 1997, adds $100 to invest every month, and the goal is to own $150,000 in stock by August of the year 2017. Due to the slow nature of dollar-cost-averaging and our relatively significant starting costs, we do not expect to seriously challenge the S&P 500 for the first three to five years as we build an investment base. The long-term advantages of dollar-cost-averaging still overcome the short-term disadvantages, however. Final note: our investment in Campbell Soup is frozen due to fees instituted in its investment plan. Click here for a history of all Drip Port transactions.