ATLANTA, GA (August 16, 1999) -- One of the things we face as Drip investors is the issue of fees. Fee structures vary from company to company. Some companies don't charge any fees. Others may charge minimum transaction fees, optional cash purchase fees, enrollment fees, and/or selling fees. So how much is too much? We've tossed around 2% as a maximum for fees, but let's see if that's feasible with a real-life company such as Coke.
First, let's look at the cost of enrollment. You can buy your first share of Coke and enroll in the Drip for $20 through Temper Enrollment Service. If I invested $50 a month for a year ($600 total), that initial cost would be 3.33% of my investment. Coke would have to return at least that to make up for the initial loss. Now, if I had invested $100 a month, my initial cost would have been 1.66% of my investment. That's not so bad.
Many plans hit you with a fee for every optional cash purchase you make. Sometimes it is for automatic investments, sometimes only for investments made with checks, and in many cases it is for both. Coke charges about $1 for each automatic investment. If I'm investing $50 a month through automatic drafts, I pay about 2% in fees. For that first year, I would have paid a total of $32 in enrollment and transaction fees, or 5.33% of the investment.
The less you have to invest, the harder you have to look at the minimum fees. If you only have $25 a month to invest, you may want to consider bypassing a company like Coke. Or do you?
It depends on your time horizon. That initial enrollment fee isn't so important the longer you hold the stock. Let's assume you stopped investing after the first year, and your returns were 12% annually. At the end of the first year, you would have an investment worth $627. Subtract the $20 enrollment fee and your investment every month of $50 has made you $7.
As the years go on, it looks better. To make calculations easier, let's say you stopped the optional cash purchases. By the end of year two, your investment is up to $702. By year five, it's now up to $987. The $32 in fees you paid is about 3%. The higher fees aren't as important the longer you stay in an investment.
What if the company's stock only provided an 8% return? At the end of year one, your investment is only worth $614 dollars. By year five, it is up to $835. That $32 in fees is 3.8% of what your investment is worth now. Meanwhile, your initial $620 has grown 39%. Again, over time your fees aren't so important. Since the nature of Drip investing is long term, time should be on your side.
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The Cost of Dripping
By Motley Fool Staff
–
Updated Dec 21, 2016 at 5:23PM
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