The Cost of Dripping

by George Runkle (TMF Runkle)

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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8/16/99 Close

Stock      Close      Change
JNJ        97 9/16    +1/4
INTC       78 9/16    -1 3/16
CPB        45         +11/16
MEL        33 1/4     -11/16
              Day      Month      Year     History
Drip        (0.88%)    7.58%     13.60%      29.20% 
S&P 500      0.23%     0.15%      8.84%      41.73% 
Nasdaq       0.28%     0.26%     20.64%      65.97% 

Last Rec'd  Total #  Security  In At    Current
 08/02/99    8.174    CPB     $52.750   $45.000
 07/01/99   21.066   INTC     $41.861   $78.563
 03/09/99    9.076    JNJ     $74.910   $97.563
 06/07/99   22.453    MEL     $33.488   $33.250

Last Rec'd  Total # Security   In At    Value    Change
 08/02/99    8.174    CPB     $431.18   $367.83  ($63.35)
 07/01/99   21.066   INTC     $881.84  $1654.99  $773.15 
 03/09/99    9.076    JNJ     $679.89   $885.48  $205.59 
 06/07/99   22.453    MEL     $751.91   $746.58  ($5.33)

Base:  $2800.00
Cash:    $24.27**
Total: $3679.14

The Drip Portfolio has been divided into 113.904 shares with an average purchase price of $24.582 per share.

The portfolio began with $500 on July 28, 1997, adds $100 to invest every month, and the goal is to have $150,000 in stock by August of the year 2017. Due to the slow nature of dollar-cost-averaging, we don't expect to seriously challenge the S&P 500 for the first 3 to 5 years as we build an investment base. The long-term advantages of dollar-cost-averaging still overcome the short-term disadvantages, however. (NOTE: our investment in Campbell Soup is all but frozen due to fees instituted in its DRP plan.)

**Transactions in progress:

7/26/99: Sent $100 to buy more JNJ.