Dividend reinvestment plans were supposed to be about building wealth slowly yet prudently. Even the very acronym gone slang -- Drip -- connoted the gradual buildup of drops into one's portfolio bucket. However, with the recent moves by some companies to begin charging additional fees to fuel their programs, the Drip term is becoming more akin to Chinese Water Torture.
Let's take Intel (Nasdaq: INTC), outside. In one of our first portfolio columns five years ago, we singled the company out as a low-cost Drip. "Most DRPs charge you nothing to invest additional money every month," we wrote. "Coca-Cola and Intel: zero fees."
While Coca-Cola (NYSE: KO) remains free of fees, it wasn't the attractiveness of Intel's Drip alone that drew us to the company. As a matter of fact, we later opted for Coke's competitor PepsiCo (NYSE: PEP) over the market share king of fizz for Port inclusion. The cover charges matter, but they're not as important as the value of the entertainment inside.
However, Intel's move to begin charging Drip investors $4 for each additional cash investment along with an extra nickel a share for each purchase -- starting this month -- is something that should be addressed here. After all, Intel was our first investment. It's a widely held stock. In many ways, Intel is a trendsetter and, if new fees are going to be the latest fashion, it's important to sashay down the catwalk wearing knowledge.
All this? Over four bucks? Heck, that's a burger value meal without the supersizing. But then you begin to work the math and suddenly you have the urge to hold the pickle. An investor sending in the minimum $50 optional cash payment this month will wind up with less than $46 worth of Intel. If you were investing in a no-load mutual fund that suddenly got slapped with an 8.1% front-end load, wouldn't you be upset? If you had set your sights on kicking in $50 a month to grow your Intel position, this isn't a move to dismiss lightly.
Our community's own OperaBob started an online petition to protest the move. Robert raises some excellent points on the misleading premise of the new charges, but, even after collecting more than 200 virtual signatures from plan participants, it's not a given that Intel is listening.
I remember a time when companies would reward investors for their mutual belief in one another. A body of shareholders who would sign up to give the company back their dividend checks -- and then some -- was a group of investors worth fighting to keep. But is this what it all boils down to? If a company feels that it no longer needs to absorb the cost of a Drip, maybe investors should start billing the companies for debt underwriting fees every time they toss a dividend check back into corporate coffers.
Granted, the solution is simple. If an investor isn't happy about paying an 8% fee every month on a $50 contribution, kicking in $100 every other month shaves that percentage in half. Holding off to make a $200 optional cash payment every four months reduces the hit to a more reasonable 2% bite. But the trend is still alarming with the Drip investor held down, new fees trickling down on the forehead.
The Moneypaper's list of fee-free companies appears to be shrinking at a time when one would think that companies would be trying even harder to keep investors from bailing. While I'm not suggesting that a multi-billion dollar company stop on a dime to heed the cries of the $50-a-pop investor, it's the bigger picture of the littler investor that worries me. You see, a Drip participant is a believer -- albeit often a small one -- at a time when faith is hard to come by. At a time when stock ownership isn't exactly in vogue and corporate distrust is all the rage, they are the few nodding heads fighting through the "out" door herd to get to the "in" door. If a company is ill advised to ignore the customers with open pocketbooks, can't the same be said in terms of treatment of its shareholder base?
Some low-cost brokers have taken to higher fees and new charges recently but their allegiance was never with the companies you were buying into. Put bluntly, they wouldn't mind if you fell in and out of love of your holdings as often as possible. That's their business. However, a company will roll out a Drip to create convenience and reward loyalty. Drip tollbooths are as logical as laying out speed bumps on the HOV lane.
Sure, small shareholders are often seen by corporate heavies as burdensome gnats -- better off swatted away than placated. When Disney (NYSE: DIS) offered to buy out investors holding less than a round lot of a hundred shares a couple of years ago, it was reasonable. It made financial sense to try to smoke out the mailing and fulfillment costs associated with the guy in Sacramento with the solitary share certificate hanging like wall art in the family den. But in implementing charges for optional cash payments, companies are actually chop-blocking the ones looking to increase their stakes. Why punish the growing investor? Why reward the dormant one?
If companies like Intel are creating situations in which it is cheaper and more flexible to amass a position through a discount broker like ShareBuilder rather than a direct relationship with the company, who will they blame when the communication breakdown leads the investors away? In short, if a chipmaker won't chip in, will investors ship out?
I created a poll on our community board to gauge the reaction of the Drip community on this hot topic. Have plan fees gotten too high over the years, or is it irrelevant for those with a long-term mindset? An overwhelming majority -- 46 of the first 48 votes cast -- felt that Drip fees are now too high. I realize that I may have been preaching to the collection basket with that query, but the mandate is pretty significant.
Does that mean the Drip Port will ditch Intel at the next trading juncture? I doubt it. That's a decision for the portfolio managers to make and I trust that the components of the company will matter far more than the logistics of the dividend plan itself. Larger investments spaced further apart should help tame the relative cost, even if it means conceding on principle. The return rate on martyrdom is awfully low these days, anyway.
But I'd like to wrap things up with some words for Drip companies. Your investor relations department won't think twice about mailing out a pricey annual report to a prospective shareholder. You will spare no expense in setting up shop at an investing fair at the other end of the country. How can you subsidize the pursuit of the incremental investor, without putting in the same kind of commitment towards the incremental possibilities of the existing investor? Just think about it. Please. Thanks for the Drip -- just don't make it torturous.