Disadvantages of Drips?
Says who? Your broker?

by George Runkle (TMFRunkle)

ATLANTA, GA (March 22, 1999) -- In any business, there is at least some competition. In my drive to work, I pass by maybe a half dozen car dealers. Compaq and Dell are going head to head, and we in Fooldom are competing with the Wise. Our friends the full-service brokers seem to be under serious attack today -- from low-commission discount brokers, and yes, Drip investing. Now, any good broker won't want to give an inch to either competitor, and will do his or her best to keep you as a loyal client. Let me go through some of the arguments I personally have heard.

"We offer dividend reinvestment." Yes, many, if not most, brokerage firms will reinvest your stock dividends into more stock. However, to the best of my knowledge, none offer optional cash purchases in stocks. If there is any brokerage that does, please post the name on our board. We'd be happy to check it out.

Now, I had a broker notch this up a little. I mentioned that I was interested in optional cash purchases, not just dividend reinvestment. He told me that there was no such thing. I told him that I'd been buying Coca-Cola, Proctor and Gamble, Texaco, and so on for years this way. He actually told me I was mistaken, dividend reinvestment plans DID NOT allow this. I told him that I was looking at my Drip statement from Coke, and yes, I had made purchases with my very own money (this was in an AOL chat room). He did give a little ground and went on to the next argument.

"You can't get your stock at the best price." I've heard this from not only this broker, but others as well. This guy insisted I was paying $3 more a share for Coke just to avoid a minor commission. Excuse me? The idea for this comes from the fact that the optional cash purchases are done on a set date. The stock may be selling quite high that day, and since the Drip plan is purchasing everything on that day, the price of the stock may be driven up.

Let's use Coke as an example. Coca-Cola makes purchases on the first day of every month. I have never seen the stock price spike on that day. It's probably because everyone knows Coke buys on that date for its Drip investors, and many traders may chose to sell on that day because of this. It tends to even out. Sure, you can't time your purchases of Coke stock to get the lowest price. I doubt your broker can either. How I was paying $3 more per share for Coke wasn't quite clear, but who needs logic if there is money to be made?

"You can't sell easily."
I've read articles that claimed it was next to impossible to sell out of your Drips. Supposedly, you're sent your certificates and you have to physically bring them to a broker to do the sale. This may have been true once, and for some poorly run plans may still be true. However, in many cases a phone call will get your shares sold in twenty-four hours.

"Record Keeping Is Impossible." In our Drip board is a link to an interesting article that patiently explains to us why we shouldn't own Drips. It seems like a certain poor individual has $70,000 in a Drip, but failed to keep any records. If he sells, his cost basis has to be $0, which will make him pay an awful lot in taxes. Well, I have to say, if you can't keep records on a $70,000 investment, you deserve to pay a lot in taxes. Record keeping is important for any investment. If you own a rental property, you have to keep records on every repair, improvement, whatever. Drips are no different. The records do require more work because of purchases of fractional shares, and small purchases, but this is made a lot easier by personal computers.

"The costs are as high as investing with a broker." Many Drip plans have costs associated with them. There is sometimes a cost associated with an optional purchase. Let me check one... Ok, here's one, Coca-Cola used to hit me for a transaction fee of a dollar for a $50 auto investment. That's 2%. If I was buying a huge amount of shares from a broker, I might pay less than that. Too bad I don't have a huge amount of money to invest monthly. If I did, Drips might not be the way for me to go. However, for us little guys that want to invest a small amount each month, Drips allow us to do so.

So, if you go to your broker and ask if Drip investing is a good idea, don't expect him or her to say "yes." We are in direct competition with them; expect them to use the arguments I've listed above. Perhaps some day brokerages will offer optional cash purchase programs to compete with Drip plans, but that's how competition is supposed to work.

To discuss investing in Drips, please visit our message boards linked at the top right of this page.

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