[Editor's note: Nelson is today's Foolish guest columnist.]

BELLEROSE MANOR, NY (August 26, 1999) -- When fellow Drip investor George L. Smyth discussed the distribution of Drip payments in his July 27, 1999 Drip Port column, he noted several other areas for discussion, including "Should I accept fees?" Singular in its ability to evoke controversy is the subject of fee tolerance in Drips. Drip fees are among the many things about which I feel strongly.

Plain and simple: I think the fees are nasty things that hurt the small investor. Fee-less Drips make investing an unparalleled pleasure. Not only do they combine the benefits of dollar cost averaging and compounding of dividend income, which typify all Drips, but they provide these features at no loss of principal to the investor; 100% of the proffered funds are invested.

Many will counter that many of the companies with Drips that charge fees are industry leaders whose track records and potential future performance justify the minimal effect of fees. To this, I have two responses... OK, three (I lied -- typical attorney).

First, there is nothing as exciting and rewarding to a small investor than refraining from that lavish restaurant lunch or cup of boutique coffee (sorry, Starbucks fans!) and using those funds to purchase stock. Over ten or twenty years, these seemingly intangible amounts can yield sizable returns. Fee-based Drips inhibit the salient effect of such saving and investing by "taxing" optional cash payments (OCPs) and making it more expensive to invest this way, as opposed to pooling the money and investing all at once with a discount broker.

For example, a $50 investment per month in a stock selling for $50, using a free Drip, yields 12 shares on a $600 investment. If the Drip charges $5 per OCP, after one year, you have 10.8 shares (an investment of only $540 after $60 in fees). If you invest the $600 with an online broker charging a $10 commission, you invest $590 and have 11.8 shares after a $10 commission. The fee-based Drip has charged you fees equal to six times as much as the discount broker, and you end up with one less share of stock.

Given this scenario, you might well opt for the discount broker, except that having to save and pool your money into a large sum and invest it all at once deprives you of the most significant benefits of a Drip: dividend reinvestment and dollar-cost averaging. If you have thousands of dollars to invest at one time, the effect of the fee is proportionately minimized. Thus, the small, diligent investor who is trying to set aside a few dollars for investment purposes (the person who can least afford it) is the one getting hurt the most by fees.

Many people may be unaware that for every industry leader with a fee-based Drip, there is often a corresponding competitor that sponsors a fee-free Drip. Witness the cases of Chevron vs. Mobil and Exxon, Home Depot vs. Lowe's, Merck vs. Pfizer. The American Association of Individual Investors (AAII) publishes a Drip program directory each year, which reflects that there are literally hundreds of fee-less Drips to chose from. These companies want your investment and the corresponding product loyalty that it potentially engenders. Why pay a fee when you can place your investment dollars with a company that has enough respect for you to enhance the value of your investment?

Finally, investor relations professionals have been quick to point out that fees are somehow justified by the "value-added services" (to use their marketing vernacular) that their "new" plans now offer -- things such as Direct Purchase of shares. However, I question whether these Drip fees actually emanate from the so-called "value-added services" or from the company's attempt to take advantage of investor enthusiasm in a bull market and exploit its unique "branding" (again, their vernacular) by charging for something that was previously absorbed as a business expense. Some would argue that the costs of administering a Drip are expensive and rising, and must therefore be passed on to the public. I suggest that these costs are no different and no less accelerating than any other investor-relation costs such as printing and distributing annual reports and proxies.

I suggest that the reasons for Drip fees are 1) that companies are being convinced by the entities that administer their Drip programs that these programs offer greater investor benefits while paying for themselves, and 2) that charging Drip fees has simply become accepted by investors. Only by saying "No!" to fees can we ensure that our complacency does not reinforce the acceptance of Drip fees.

As for Direct Purchase plans, which are often used to justify an across-the-board fee structure in Drip plans, I have noticed that the initial fees (often ranging from $10 to $30) often rival or exceed the commissions charged by discount brokers. In my experience, it has been relatively painless, more economical, and more expedient to purchase the initial share from my discount broker, register it in my name, and then participate in the underlying company's Drip program.

There are tangible benefits companies derive from Drip programs, which I feel justify the absorption of the expense by the company. These include the promotion of investor loyalty, consumer loyalty for the company's product or service, and brand recognition. Drips foster a stable investor base, since most Drip investors are long-term. Moreover, they enhance and facilitate the company's ability to raise capital without resorting to corporate debt or other expensive vehicles.

When it comes to Drip fees, I say, "ZERO TOLERANCE!"

Fool on!

[Nelson E. Timken posts on the DRIP boards as FoolishFinancier. To discuss this column, please visit the Drip Basics message board.]