Some dividend reinvestment plans grant you a discount on your reinvested dividends and cash purchases. This is like being paid to invest. Whenever you invest, you are paid by the company in more free stock. Investors should consider plans that offer this service. While some companies that promote discounts in their Drip plans aren't very attractive, others are.
Early in my Drip education I learned that there are some companies that actually pay people to invest, by discounting the price of shares purchased using reinvested Drip plan dividends. Whereas everyone else might pay $100 for a share, a Drip participant in a company plan offering a 5% discount would be able to buy those same shares for $95.
Additionally, there are companies that extend discounts to cash purchases (considerably more important), and some companies that discount both Drip and cash purchases. I first thought that there must be a catch, but the only thing I found was that these were generally companies that I had not considered buying.
I like to place my resources in the best possible place, so I decided to put some of these companies to the test. I pulled out my Guide to Dividend Reinvestment Plans and started looking for companies that offered discounts. I really didn't want to go through every company in the book, so I compromised and started with the letter N, working my way forward.
I found 31 companies that offer some sort of discount (actually, there were a few more, but I couldn't find historical information for them, so they may have merged or been bought out). Of these companies, 29 extend discounts through their Drips, and nine offer cash-purchase discounts. The cash and dividend discounts average about 3 1/3%, with one as low as 1% and one as high as 10%.
The question then became whether the companies are worth the discounts. I looked at the performance of each company over the past five years, by assuming that regular $50 purchases were made on a monthly basis, and compared these results to the S&P 500 Index. I did not take dividends into account (and some of the companies paid pretty high dividends, so keep that in mind), but I did include the price discount in each of the $50 cash purchases.
Of the 29 companies, five beat the S&P 500 Index, and only one of these companies offered a discount on cash purchases. Overall, the companies averaged less than 80% of the return an investor could have achieved by dollar cost averaging the same money into the S&P 500. The companies that offered discounts on cash purchases averaged only 62% of the S&P 500's return, with the others averaging 86%. The table below shows the bright spots, with their returns.
Time Warner Inc. (NYSE: TWX) 167.98%
Telephone & Data Systems (NYSE: TDS) 148.95%
Valley Resources (AMEX: VR) 138.13%
The Spain Fund, Inc. (NYSE: SNF) 125.69%
Southwest Water Co. (Nasdaq: SWWC) 114.03%
Does this relatively poor performance mean that you should not bother considering companies that offer discounts? Absolutely not! When I look at the companies on my spreadsheet, I see numerous banks, and many of us know that these institutions have had a rough go lately. If you feel that you can properly evaluate companies in this sector and believe that their time may be due to perform better, then there are certain to be some wonderful bargains available to Drip -- and at a discount.
If you have Excel 97 (or newer) and wish to take a look at my spreadsheet of companies offering discounts, be prepared for a long download (almost 400k) and go to http://members.home.net/hmpi/Invest/Support/001004.xls.
Additionally, last year Vince Hanks (TMF Elwood) wrote about Drips at a Discount, and shared that a search on Netstock Direct turns up 112 such plans. Check out Vince's column.
P.S. Take a poll! Do you invest in Drips that provide you a discount on stock purchases or reinvested dividends? Answer in our Fool poll.