The Fool FAQ

DRIPS

The Fool FAQ

DRIPS. Besides being irritating plumbing problems, what exactly are they? In an investment sense, of course!

DRIPS are Dividend Reinvestment Plans. That is, the dividend payments you might normally receive as cash, are reinvested in additional company shares for you by the company. The advantage here is that the transaction costs are low and sometimes completely covered by the companies offering DRIPs. Basically, DRIPs are an inexpensive and simple way to increase your equity position in some really fine companies.

But there is one other BIG advantage to DRIPS. Once you are in one, you can buy or sell shares in the company without paying a brokerage commission.

Most DRIPs require you to own at least one share of stock in the company before enrolling (we'll discuss how to achieve that later) but some, called DPP's (Direct Purchase Plans) will sell stock directly to the public.

DRIPs sound interesting, but I'm unclear on exactly what I should be looking for in a DRIP program. Will some Fool step forth and explain to me what the important features of a good DRIP are?

The important features of a good DRIP include:

  • Direct purchase for initial shares.
  • At least weekly or daily buys and sells.
  • Little or no fees. I think a $5 enrollment fee is reasonable, as are charges of $1-$5 per purchase.
  • Automatic investment services.

and last but most certainly not least, a good, sound company with solid growth potential. All the great features in the world won't make a DRIP profitable if the company stagnates for the next 10 years.

Where can I get a listing of company numbers so I can order drips?

Just ask!

  1. Direct Stock Purchase Plan Clearinghouse, at 800-774-4117. This free service allows investors to order up to five prospectuses from companies that offer direct purchase plans--DPPs. (This is for direct purchase plans only, not all DRP companies.)
  2. Standard & Poor's Directory of Dividend Reinvestment Plans, at 800-852-1641. This annual directory lists all the companies with dividend reinvestment and direct-purchase plans and provides details. Price: $39.95.
  3. The Direct-Investor website, offers a list of companies with direct investment plans, updated daily. You can also get a copy of the list by calling 900-225-8585. The call costs $2.50.
  4. The Moneypaper website lists all the more than 900 companies that offer DRIPs, along with information and forms to get you started.

OK, if a company I like isn't a DPP, how do I get in?

Most Dividend Reinvestment Plans require investors to own a single share before enrolling. If you're not using a broker to buy that one share and put it in your name, there are other options, some of them listed here:

  1. First Share, at 1-800-683-0743, links members with investors willing to sell a single share in a company. Members pay sellers market value plus $7.50. Membership is $18 a year, and First Share also charges $10 for each transaction. About 3,700 members hold shares in 300 companies. The program is meant for investors who want to enroll in at least three dividend reinvestment plans.
  2. National Association of Investors Corp., is open to individual investors for a $39 annual membership. First single shares are available for about 160 companies. Stock purchase fee: $7 per company.
  3. The Moneypaper, at 1-800-388-9993 and on the Web at http://www.moneypaper.com. First-time subscribers referred by the Fool pay $40.50 for a year's subscription to this monthly newsletter, which also includes the full Directory to Dividend Reinvestment Plans. Subscribers can buy single shares of more than 900 companies. Stock purchase fee: $15 per company. $20 for non-subscribers.

Can DRIPs be used in IRAs?

Yes. There are a couple of ways to go to get DRIPs in an IRA. The biggest problem is finding a custodian for a self-directed IRA with DRIPs. Most brokerage firms don't want to touch them because the broker is "out of the loop" since you're investing directly with the company. One fix is to invest in those DRIPs that have IRAs built right into their plans. Exxon, ATMOS Energy, SBC Communications, Morton International, and Philadelphia Suburban are just a few of the DRIPs with IRA options (ATMOS and Philadelphia Suburban offer no-fee IRAs; the others charge usually $20-$35 per year to administer an IRA). Another route is to get an outside firm to act as custodian. One firm which does this is First Trust (800-525-8188). They specialize in providing custodial services for IRAs with DRIPs. You might want to give them a call to check on their fees.

How are stock certificates handled when you traffic in DRIPs?

There are three types in DRIPs, in reference to certificates:

  1. Companies you can invest in without ever seeing a certificate. These are companies like Mobil, who let you purchase your initial shares directly from them.
  2. Companies that will accept mailed certificates for safekeeping, which is better than holding the certificates yourself. 3M is one such company.
  3. Companies that do not have any safekeeping feature in their DRIPs. These are annoying. You have to handle all those certificates yourself.

All this information is available in the prospectus. You just have to read all the fine print to see how they deal with certificates.

I'm a bit puzzled by the timing of investments shown on my DRIP statement. Can some Fool provide some insight into this issue?

There are investors who feel their DRIP investments are not being invested on a timely basis. One individual, in particular, sent his DRIP statement showing that his investment was held more than 30 days before it was invested by the company. The individual's DRIP statement in this particular instance (the company was Illinois Central) showed that the optional cash investment was deposited by the transfer agent on February 9, but the investment was not made until March 20. The individual at the transfer agent stated that money for Illinois Central must be to the transfer agent five business days prior to the investment date (this is standard for most DRIP plans). The investment date for Illinois Central is the 15th of the month. In the case of February investment date, the 15th of the month was a Thursday. Since the money was received Friday, February 9, the money was received less than five business days prior to the investment date. Thus, the agent held the funds until the next investment date, which was the 15th of March. A question that some of you may be asking at this point is the following: If the money is invested on the 15th, why does the statement show an investment date of March 20? The reason is that Boston EquiServe shows the settlement date on its statements. The settlement date is three business days after the trade date. Thus, open-market purchases in the Illinois Central DRIP on March 15 (which was a Friday) did not settle until three business days later (which was March 20). Remember that the purchase price listed on the statement was the purchase price on March 15. However, ownership of the shares did not take place until the trade settled, which was March 20.

This example brings up several important points to understand when investing in DRIPs and reviewing your DRIP statements:

  1. Make sure you know the DRIPs investment dates each month, and make sure you get your optional cash investments to the plan at least five business days prior to the investment date. If you are worried about remembering to make the investment date each month, see if the firm's DRIP provides automatic debit services from your bank account.
  2. If a DRIP is issuing new shares through its plan, there is no settlement period. However, if the DRIP is buying shares on the open market for its DRIP participants, such purchases settle three days after the trade date. This is important to understand when looking at your statements.
  3. It is not uncommon for a DRIP, which is purchasing shares on the open market, to space out buying over several days. Thus, don't be surprised to see one of your DRIPs -- perhaps a DRIP with an investment date each month of the 15th -- buying stock as late as the 21st or 22nd of the month. Depending on the amount of funds being invested in that particular period, a firm may want to space its buying over several days rather than push the stock price higher by making a large purchase of stock for the plan in a single day.