Early in the year, our crack Fool Customer Service team received a phone call from an unhappy woman. She had read Investing Without a Silver Spoon and then tried to enroll in several "direct stock plans" offered by the likes of Intel (Nasdaq: INTC), Home Depot (NYSE: HDT), and Johnson & Johnson (NYSE: JNJ).
"I called each company," she said, "and none of them offered a direct stock plan, or if they did, they only offered it to employees. So your book is wrong."
She wasn't, well... happy.
Fool CS gave her message and phone number to me, the Drip book's author. That morning, after a nervously contemplative cup of coffee, I returned her call.
"Hello!!!?" she literally answered..
I introduced myself and told her that I'd heard about her problem. She explained it again. I said I thought I had a solution. I believed that the companies she had called misunderstood her. The companies she mentioned indeed did not offer Direct Stock Plans (DSPs), they offered Dividend Reinvestment Plans (DRPs).
I went on to say, "The two types of plans are different, even though we call both these plans direct investment plans, and we call the method of investing in both plans Dripping -- for dripping money in steadily."
"Ah," she understood, "So I was asking for the wrong type of plan?" Yes, I replied. I was surprised that the company representatives hadn't understood what she wanted, but I believed that's what happened.
We continued talking and by the time we were ready to hang up, she asked, "So who is this again?" I told her and she said, "Wait. So you wrote this book?" Yup, I replied. "Oh, I'm surprised!" her voice rose. "Gee. Shouldn't you be off on some island somewhere?"
I paused. "Well, maybe, but books don't�"
"I really have bought this book for all my children," she continued. And so we went on talking.
She didn't have computer access, so I hope that she was able to enroll in the dividend reinvestment plans on her second try (I'm calling her back at a later date), because the process can be confusing. In fact, it's high time that we review the process for the new investors rolling into Fooldom each month.
Direct investment plans: Dividend Reinvestment Plans and Direct Stock Plans
Dividend Reinvestment Plans (DRPs) are the more common of the two types of direct investment plans available. More than 1,100 companies offer a DRP. The companies our caller was interested in offered DRPs.
You may enroll in a company's DRP once you are a registered shareholder of the company's stock. Typically, you only need to own one registered share, but sometimes you must own five shares or more. As you're buying the shares, you should concurrently call the company and ask for its DRP enrollment form. Once you own the correct number of registered shares, you mail in the DRP enrollment form (with or without the actual stock certificate). Within weeks, you'll be enrolled and ready to invest commission-free, direct through the company's plan.
How do you get the first shares that you need? A broker will buy them for you and charge a fee to put the stock in certificate form and registered in your name. The fee is typically around $35 (but ask about the fees before you do this!). To avoid fees, you may ask a friend to transfer one of their registered shares to you. If you don't open a brokerage account or have a friend with shares, the most reasonable service that we know of for enrolling in DRPs is Moneypaper's Temper of the Times -- they'll buy the shares that you need and enroll you in the DRP for $30 per company, plus the cost of the share. From there on, you deal only with the company's commission-free (ideally) DRP.
In contrast, Direct Stock Plans (DSPs) are extremely easy to start. Most direct stock plans allow you to enroll directly online with the company, and you needn't be a shareholder to enroll. Paychex (Nasdaq: PAYX), our most recent purchase, has a direct stock plan that simply requires investing $250 to start. Most DSPs require this sort of dollar amount for your initial investment, but it's worth it for the convenience, speed, and savings compared to starting a DRP.
That said, not all DSPs or DRPs are worth using. Beware of plans that charge a commission on each optional cash purchase or on reinvested divests. You can find information on DSPs on companies' investor relation web pages or listed on NetstockDirect.com. You can find a list of companies offering investor-friendly (minimal fee) DRPs on Moneypaper.com.
Alternative ways to invest regularly and economically
Unfortunately, a majority of companies do not offer either a free DRP or DSP, but in the last few years alternative ways to invest regularly in most all companies in small amounts and at reasonable cost have emerged. Many investors complement their free Drip investments with a few investments in companies via ShareBuilder.com or BuyandHold.com.
These are two low-cost brokers designed to help investors invest in stocks every month in whatever dollar amount wished and reinvest dividends free of charge. (You may purchase fractional shares of stock, just as with direct investment plans.) You can also open IRA accounts with these brokers, which is a sweet option not offered by 99% of DRPs and DSPs.
Be certain to thoroughly read about the fees (some monthly) involved with these two low-cost brokerage houses, and study the investment schedules that each offers to determine which suits you. Used efficiently, these can be excellent services for small, regular investors.
That said, we believe that if you can buy a company directly through a DRP or DSP free of commission, you should favor that (because even small fees add up!). Consider BuyandHold or ShareBuilder, however, when you wish to regularly buy companies that don't offer fee-friendly direct investment plans, if you want an IRA investment account, or in other situations that aren't possible via a free DRP or DSP.
For more learning
To learn much more about Dripping, low-cost investing, how you can get started, and what to look for in companies, see Drip Port's info pages, and see additional complete information in the Fool's School.
Jeff Fischer's profile displays stocks he owns. He's on leave, so unable to answer e-mail. The Fool Community, Fool's School, or [email protected] can help you. The Fool has a disclosure policy.
