DRIP PORTFOLIO

The Drip Portfolio
The Beauty of Mindless Investing
Automatic deductions via direct investing plans

By Mike Olivo (midstate on the message boards)

The Fool is honored today to publish a column written by Fool community member Mike Olivo. If you would like to pen a guest Drip Port column, please contact us.

ALEXANDRIA, VA (Nov. 2, 1999) -- I began investing in 1996, so I'm fairly new at it. I don't make a lot of money since I'm a high school teacher. (Check out the teachers message board in the Fools of a Feather folder.) I have five investments: my education, my house, my Roth IRA, my Drips, and my 403(b), which is similar to a 401(k).

In my Roth IRA, I buy stocks that I expect to grow. In my 403(b), I invest in an index fund with USAA. All my stock purchases outside of retirement plans are in companies with Dividend Reinvestment Plans. For stocks with direct investing plans, I have a few screens.

I have five Drip stocks. I tried to choose them from different industries to give myself some diversification. I wanted stocks that I liked for the long term. But the Direct Investment Plan itself has been a very important element in my strategy. I looked for stocks with no fees, low fees, or where the company pays the fees. I also looked for company plans that offered automatic deductions from my checking account.

Q: Why were automatic deductions so important?
A: Because they are mindless.

I don't want to think about sending in a check every month. I have enough mail to deal with and enough bills to deal with without having to write checks every month to buy stocks. Every five weeks, I have to give grades for more than 150 students. Do I need more paperwork on my desk? No, thank you.

So, automatic investing is a great service. Maybe it's not for everybody. A lot of people want to be more hands-on. That may be great for them, but as I sit in my study room now, I notice piles of papers. If I don't notice them, my wife soon reminds me. Do I want to write one to five more checks a month, put them in envelopes, put stamps on the envelopes, and drop them in a mailbox? No way! I would rather have the money taken out of my checking account and not really deal with it until I get my monthly statement that says I have more shares (or more partial shares) of the company.

It is also a great way to use dollar cost averaging. When the stock is up, I'm happy because I have more net value in a company. When the stock is down, I'm happy because I get to buy it cheaper that month. I think that my companies will be up in the long term. In the short term, I don't have to worry about pricing. Sometimes it's up. Sometimes it's down. Mindless.

Four of my companies (Bell South, Exxon, Intel, and Montana Power) do automatic deductions for free. One company, Johnson & Johnson, charges a dollar for each automatic investment. Sure, I would prefer to have that $12 at the end of the year, but if I paid 33 cents for the stamp and 3 cents for the envelope, I would be out 36 cents a month anyway. So, in a way, I'm only paying 64 cents for the service.

Two final thoughts:

First -- discipline. If I had to send the money in myself, I probably wouldn't do it. With automatic deductions, I know that the money will leave my checking account on a certain day. If I knew that money would still be in my account, I might not send it. I would spend it on something frivolous like food or shoes for the baby. (I'm kidding here, OK?) The point is that, like my 403(b) contribution that comes directly out of my paycheck, this is one way of being Foolish by paying myself first.

Second -- a caveat. Make sure you have money in your checking account if you plan to use automatic investments. Otherwise, your bank will probably ding you with a charge for overdraft protection. The point of direct investing is not to have fees -- including bank overdraft fees.

To discuss this column, please visit the Drip Companies message board.

Drip Portfolio

11/2/99 Closing Numbers
Ticker Company Dly Pr Chg Price
CPBCAMPBELL SOUP-3/16$45.56
INTCINTEL CORP1/2$77.50
JNJJOHNSON & JOHNSON-2 9/16$102.50
MELMELLON FINANCIAL CORP11/16$37.31

  Day Week Month Year
To Date
Since
7/28/97
Annualized
Drip .46% -.24% -.24% 17.87% 34.05% 13.80%
S&P 500 -.47% -1.11% -1.11% 9.64% 43.56% 17.29%
S&P 500(DA) -.47% -1.11% -1.11% 10.22% 46.19% 18.23%
S&P 500(DCA) n/a n/a n/a n/a 22.36% 9.31%
NASDAQ .47% .51% .51% 35.98% 89.96% 32.72%

Trade Date # Shares Ticker Cost/Share Price LT % Val Chg
9/8/9721.0839INTC42.592$77.5081.96%
11/14/9711.258JNJ79.965$102.5028.18%
11/5/9825.5267MEL34.137$37.319.30%
4/13/988.174CPB54.586$45.56-16.53%

Trade Date # Shares Ticker Cost Value LT $ Val Ch
9/8/9721.0839INTC$898.01$1,634.00$735.99
11/14/9711.258JNJ$900.24$1,153.95$253.70
11/5/9825.5267MEL$871.40$952.47$81.06
4/13/988.174CPB$446.18$372.43($73.75)
  Cash: $24.38  
  Total: $4,137.22  


Key
• S&P 500 (DA) = dividend adjusted. Dividends have been added to the total return of the index.

Note
Drip Port launched with $500 on July 28, 1997, adds $100 to invest every month, and the goal is to own $150,000 in stock by August of the year 2017. Due to the slow nature of dollar-cost-averaging and our relatively significant starting costs, we do not expect to seriously challenge the S&P 500 for the first three to five years as we build an investment base. The long-term advantages of dollar-cost-averaging still overcome the short-term disadvantages, however. Final note: our investment in Campbell Soup is frozen due to fees instituted in its investment plan. Click here for a history of all Drip Port transactions.