Last week I talked about the first three categories of what we refer to here when we're talking about Drips: the standard plan, the direct option, and the Pseudo-Drip. This week we will make a few comparisons to help guide us to the best route for accumulating shares. The less we pay in fees, the more shares of stock we can accumulate.
To start, I consider the selection of the company to be the most important consideration, with the limitations imposed by the plan running a very close second. A bad company with a great direct investment plan is still a bad investment, but a good company can be compromised by a bad plan. Remember that the fees come off the top, so the stock must advance to cover the fees before getting to the break-even point.
Another point about fees is that their impact is normally dependent upon the amount of the investment. A flat fee of $2 represents 4% of a $50 purchase, 2% of a $100 purchase, and 1% of a $200 purchase. The Motley Fool suggests that fees make up no more than 2% of one's investment. I recommend that individuals set their own comfort level on this.
Another suggestion for dealing with fees is to withhold investment funds until they can accumulate enough to make a large purchase. Indeed, this will diminish the effect of the fee. However, there are a couple of difficulties here. The first is that while saving to make the purchase, the cash will probably sit in a non-interest-bearing checking account, instead of working for you.
The other problem is that fewer purchases will be made. This increases risk, and after all, risk reduction is the whole idea behind dollar cost averaging. Again, this is a situation that each person must understand, then react based upon his or her own comfort level.
So let's make a few comparisons with companies frequently mentioned on the boards: Coca-Cola (NYSE: KO), Enron (NYSE: ENE), Campbell Soup (NYSE: CPB), and Cisco Systems (Nasdaq: CSCO).
I will make a few assumptions here, and you can adjust the numbers for your situation. I will assume that one begins their standard Drip through MoneyPaper, and will use the compromise value of $2.50 for the Pseudo-Drip fee.
I will not include fees on dividend reinvestment or company-paid fees, as these depend upon the number of shares purchased.
I also will not include postage in the comparisons because there are numerous ways to save money in this respect. Some will send one purchase in an envelope, some will send multiple purchases (every other month I send three purchases to three companies to the same transfer agent in a single envelope), some will use an Internet bank, and some will have funds withdrawn automatically from their bank.
We will look at the different possibilities for each category and company, and determine the best route.
Coke Standard Direct Pseudo- Plan Purchase Drip Start-up Cost $20 N/A $0 Monthly Fee for 10 years (120 purchases) $0 N/A $300 Total Fees $20 N/A $300 Enron Standard Direct Pseudo- Plan Purchase Drip Start-up Cost $20 $17 $0 Monthly Fee for 10 years (120 purchases) $0 $0 $300 Total Fees $20 $17 $300 Campbell Soup Standard Direct Pseudo- Plan Purchase Drip Start-up Cost $20 $15 $0 Monthly Fee for 10 years (120 purchases) $600 $600 $300 Total Fees $620 $615 $300 Cisco Standard Direct Pseudo- Plan Purchase Drip Start-up Cost N/A N/A $0 Monthly Fee for 10 years (120 purchases) N/A N/A $300 Total Fees N/A N/A $300
As you can see, there are some clear winners and losers. Coke doesn't have a direct option, but the standard plan is obviously the way to go. It doesn't matter how one gets enrolled in Enron's plan, but the Pseudo-Drip clearly makes little sense. In the case of Campbell Soup, we can see why the high fees (among other factors) figured in the Drip Port managers' decision to cease additional investments in Campbell, and why the Pseudo-Drip plan would be the proper route. If your selection is Cisco, you have no choice other than the Pseudo-Drip.
So before leaping, look around to ensure that you are taking the issue of fees into consideration when determining the proper route to acquire your shares. The less you lose to fees, the more you will have to buy stock in your company.
To discuss this column, please visit the Drip Companies board linked below.