DRIPs, as they are commonly called, are company-run plans that allow you to invest in a firm's stock with a modest initial outlay and continue to reinvest dividends to buy additional shares.
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Of roughly 1,100 available DRIPs, around half permit you to buy your initial stock directly from the company with no broker needed. The rest generally ask that you initially buy stock from a broker to start out in their plans.
Low initial outlay and gradual buildup at fluctuating stock prices allows for dollar-cost averaging to smooth out risk. You can join additional DRIPs of other companies' stocks on your way to diversifying. Many companies boosted their dividend payouts in recent years, a plus for the growth of your holdings.
"A lot of people are jittery about this market, worried they'll be getting in at the top but still wanting to be in the market," said Vita Nelson, editor and publisher of The Moneypaper (which has a searchable DRIP directory at www.directinvesting.com) in Rye, N.Y. "With DRIPs, you can start out with very few shares and continually build your holdings at different price points in a volatile market."
Many investors are intrigued by the concept. Some individuals always will prefer stocks over mutual funds because they like to follow a company, though DRIP investing can't provide the diversity of a mutual fund owning dozens or hundreds of different stock names.
DRIPs require that you be a careful record-keeper for tax purposes so you are aware of the cost basis, or original price, of stock holdings you're amassing. A few investors become carried away with a case of DRIP fever, going far beyond simply building a portfolio to almost turning them into collectibles, too many of them virtually identical in characteristics.
"I tell investors they should buy three or four DRIP stocks first and see how they work for them, then continue to add new plans to the mix," said Charles Carlson, editor of the Hammond-based DRIP Investor, which publishes an annual directory available for $14.95 at www.dripinvestor.com. "However, you don't want to get into 20 stocks in six months or acquire them like baseball cards, because you'll just wind up with too many stock names over time."
The DRIP offered by Bank of America Corp., the national and global bank holding company, is recommended by Carlson and Nelson. It offers a solid dividend and potential for price appreciation. The plan's minimum initial investment is $1,000 (many plans require just $250), with subsequent investments a $50 minimum.
Just as minimums for initial and subsequent purchases vary among DRIPs, so do fees. Most plans have an enrollment fee of $5 to $15 and purchase fees of $1 to $5, Carlson noted. Nonetheless, fees are competitive with the lowest fees charged by brokers, he said.
Some investors complain that their brokers don't offer much information or advice about DRIPs, because they don't receive commissions for them. On the other hand, the chief concern of some financial planners is that even a dozen DRIPs won't provide enough diversity in an individual's holdings. Investors always must consider other investments besides strictly dividend-producing shares, they contend, and DRIPs should therefore be a component, not the mainstay, of an individual's portfolio.
"Many times I see people who own DRIPS not being properly diversified because they are all Standard & Poor's 500 stocks," said Bryan Lee, certified financial planner with Strategic Financial Planning Inc. in Plano, Texas. "They don't have the international exposure that they need, and you also don't find too many small-cap DRIPs."
Remember, a DRIP is simply a handy and cost-effective way to invest in stocks. It is therefore most important to carefully study the merits of the underlying stock, no matter how attractive a particular DRIP's investment features may be. Don't select a DRIP only because it has no fees or has especially low fees.
If you become a DRIP investor, seek diversity in industries.
In the consumer area, Carlson recommends the DRIP of PepsiCo. Inc., a powerhouse in snacks besides cola, while Nelson prefers rival Coca-Cola Co. for its extensive international exposure. In energy, Carlson suggests Exxon Mobil Corp., and Nelson likes BP PLC. Other favorite Carlson DRIPs that have low fees and allow you to buy directly from the issuing company include:
-- Emerson Electric Co., a maker of electric equipment and electronics.
-- Becton, Dickinson & Co., a medical technology company in supplies, devices and equipment.
-- Lockheed Martin Corp., a technology systems and defense leader.
Additional direct-purchase, low-fee DRIPs favored by Nelson include:
-- MDU Resources Group Inc., a large company that just bought Cascade Natural Gas.
-- International Paper Co., the biggest paper and forest-products firm, which is narrowing its focus on unbleached paper and boxes.
-- Paychex Inc., a provider of payroll and benefits services to small businesses.
-- Tennant Co., a small firm that makes floor-maintenance equipment.
Andrew Leckey is a Tribune Media Services columnist.