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Investing Through DRIPs

Starting a DRP

Drip Investing

So you have decided that purchasing stock directly from the company in small monthly installments is right for you. You are probably wondering how you can do this with minimum fuss and muss. The answers, dear Fool, await.

Direct Purchase Plans

Some companies actually encourage individual investors to own shares by selling them to you directly. Called Direct Investment Plans, more and more companies are using these as a way to sidestep what they perceive as the high fees charged by transfer agents to run a Dividend Reinvestment Plan externally. These companies simply run the Direct Purchase Plan from within, selling shares to the investor without ever needing to deal with another party.

Pros

  • Investors like DIPs because they do not need to already own one share.
  • DIPs tend to be low fee and offer more extra services like IRAs.

Cons

  • Very few companies have DIPs, although they are increasing in number.
  • DIPs normally require a high initial investment or a fixed monthly investment for a fixed period of time to participate.
  • Not all DIPs are immune to the high-fee disease spreading through the industry.

Dividend Reinvestment Plan / Optional Cash Purchase Plan (OCP)

All Dividend Reinvestment Plans (DRPs) require that you own one share before you get to participate -- otherwise they would be Direct Investment Plans (DIPs). This is the most common form and they spring historically from the infrastructure that companies set up to allow employees to buy stock from the company (see History of DRPs).

(Again, remember that even though investors say DRP, short for Dividend Reinvestment Plan, this name is a bit of a misnomer as they are really talking about the Option Cash Purchase Plans where you can buy new shares, not just the DRP where you reinvest dividends.)

If you need to own a share before you can become part of the plan, what's a poor Fool to do? How can you get that first share? Thankfully, there is a whole range of possibilities for a Fool to explore. We will first lay out all of the basic elements that you need to get done and then throw up a list of some of the possibilities.

Pros

  • You can invest in more companies
  • Low initial investment

Cons

  • Need to get the first share somehow
  • Sometimes have high fees
  • Rarely offer additional services, like IRAs

Buying the Share

Obviously, one of the key things that needs to happen is somehow the share needs to get bought for you. There are a number of ways to do this, ranging from having a broker buy you the share to using a service that specializes in supplying the first share to you. The services that specialize in DRPs do a lot more for you than just buying the share, as you will learn in a moment.

A word about getting the share through a brokerage. Many beginning Direct Investors make the mistake of thinking that if they just buy the shares in a brokerage account, that will count toward setting up a DIP/DRP. Unfortunately, this is not the case. To set up a DIP or a DRP, you need to have the shares issued in a certificate in your name. Depending on the brokerage, they will will charge you a flat-fee for getting the certificate, although some have been known to do it for free. (Apparently, some Dean Witter offices have specifically been very helpful in this regard.) Without the share in a certificate in your name, you cannot set up the DRP/DIP.

Contacting the Transfer Agent

After you get the share in a certificate in your name, you have only just begun. The prospective Direct Investor needs to get the application from the Transfer Agent used by the company to manage the DRP/OCP plan. A Transfer Agent is kind of a middle man used by companies in order to facilitate the DRP process in a very low cost setting -- at least for the company. You need to find out the number for the Transfer Agent and call them to get an application. If you do not have any kind of guide with DRP information, calling the company's Investor Relations department to find out the number for the Transfer Agent would give you that information. (Some companies may even send you the forms directly, so don't forget to ask as long as you have them on the phone.) Some transfer agents may not send you the paperwork unless you are a registered shareholder, so don't forget to register. Some companies are even forgoing certificates and going to a complete, book-entry registration system for issuing shares.

Finishing Up the Paperwork

After you get the forms and you have your share certificate in hand, you fill them out and then mail the forms to the company. The Transfer Agent will receive the paperwork and then process it. This can take some time, specifically because you are opening a new account. After you open the account and have confirmation, you may want to consider mailing in the share as well to put in the Transfer Agent's safekeeping program, which keeps track of all of the shares for you. If you do mail the share you may want to consider getting mail insurance as if someone else gets the mail, they could forge your name on the certificate and cash it. Additionally, some plans will not let you send in cash investemnts until after your first dividend has been reinvested, while some may actually allow you to send in your first investment with the forms.

Is There An Easier Way?

Getting the certificate, getting the Transfer Agent info, filling out the paperwork and getting the DRP opened can turn into a rather long process. One way to avoid a lot of this hassle is to avoid needing the certificate in the first place. There are a couple of options here, ranging from finding a friend who is already in the DRP you want to using a service dedicated to DRPs.

A Friend? Or Family Member? How Can They Help?

One of the interesting features of a DRP program is that long ago they designed a pretty easy way to transfer shares from one person to another to facilitate giving gifts. The paperwork for most plans to transfer a share is actually less involved than the paperwork to open a new account. If you know someone in the DRP, simply have them contact the Transfer Agent to get the proper forms to give shares to another person. Pay them whatever your friend or family member asks for the share (within reason) and then have them sign the paperwork and mail it in.

A Service? Can A Service Help Me?

A number of entrepreneurial minds realized early on that if they amassed shares in DRP plans and then were to transfer shares to other people, they might be able to make a little money and help investors at the same time. Thus the MoneyPaper's Temper of the Times Service, First Share, and the National Investors Association Corp. (NAIC) "Own a Share of America" Program were all formed.

Each of these services will transfer you into a DRP for one set fee after filling out some minimal paperwork. NAIC has access to about 200 or so DRPs, but you need to be a member of each non-profit organization to take advantage of their low fees. First Share works by having new members promise to transfer other new members into the plan at some future point in return for getting transferred in now, but sometimes it can be a problem if the member who was supposed to help you takes a vacation or leaves town unexpectedly. MoneyPaper maintains access to 920 DRPs, for the same fee, which is discounted for people who subscribe to their newsletters.

A Helpful Summary

This chart should illustrate the ways to get involved in one of these plans with all of the pros and cons.

  Fees Transfer? # of Plans?
Direct Investment Plan Depends Yes Very Few
Brokerage Firm $10-$100 Nope All
First Share Member +~$18 Yes ~500
NAIC Member +$7 Yes ~150
Temper of the Times $15 or $20 Yes 920