The
best advice that we as investment advisors can offer to new investors is quite
simple: SAVE! Over the past several years, many brokerage
firms have increased their minimum account size, despite the decline in commission
costs, continuing to make smaller transactions cost prohibitive. As a result,
DRIP plans have become heavily promoted as viable solutions to new investors entering
the stock market.
DRIPS, or Dividend
Reinvestment Plans as they are formally known, are plans provided by various public
companies, which allow stockholders on record to buy additional shares, or reinvest
dividends from existing positions into new shares, directly through the company.
Essentially, this affords investors the opportunity to avoid commissions and fees
at a brokerage firm, while accumulating shares in their favorite stocks. The criticism
to these plans has been that to start a DRIP, the investor must already have a
position in the company, which hurts the new investor. Today, however, many companies
are increasingly modifying their DRIP plans to allow prospective investors to
purchase their initial and subsequent shares directly. Therefore, the investor
would not need to have shares in the company in order to set up a DRIP.
Because
of this growing trend towards direct initial purchase, DRIP plans are very attractive
to new investors with limited funds seeking to begin an investment program that
includes stocks. With a DRIP plan, the investor sends money to buy additional
shares of stock at regular intervals, and/or buys new shares with dividends being
paid on their existing shares. This savings methodology, known as dollar cost
averaging, is a proven, effective method of wealth accumulation, and ideal for
new investors. In fact, many DRIP plans can be arranged with investments as low
as $10.00 per month. Many companies have even made DRIP plans very flexible over
the past few years with services such as online account access, direct deposit
from checking, and cash payout of dividends. A number companies will even offer
purchase discounts from the stock's market value by as much as 15% in some instances.
While some DRIP plans assess a nominal fee either at inception or throughout the
plan, most DRIP plans can be started and maintained at no cost. But, buyer beware,
a few companies have raised fees within their DRIP plans to discourage small investments,
so be certain to compare costs if you are choosing among several potential stocks.
Investors should note, however, that
a DRIP plan may not be appropriate for everyone, and likely limited to prospective
investors just beginning a savings plan. With a DRIP plan, the shares are purchased
for the investor at a fixed date and time each month despite market conditions
and pricing. More sophisticated investors, however, may find it advantageous to
buy and sell shares at their discretion on any day of the week; a benefit afforded
to those with accounts at a brokerage firm and not through a DRIP. Additionally,
should you need to sell your shares for immediate cash needs, you will not be
able to do so in a timely manner inside of a DRIP plan. Many Dividend Reinvestment
Plans also have maximum investment limitations; therefore, investors with larger
portfolios will be better off effecting all of their transactions in their investment
accounts despite commission costs. Prospective DRIP investors should also beware
that it is imperative to keep good records for income tax purposes in the event
you sell all or part of your shares. DRIP plans are regarded as bookkeeping nightmares
because most investors are making several small transactions over the course of
a long period of time. In fact, once you have accumulated a round lot of 100 shares
of stock inside a DRIP plan, we recommend moving these shares to a discount brokerage
firm.
There are many sources available
for those that seek more information on Dividend Reinvestment Plans to determine
if this type of investing is an option for you. The best place to turn, of course
is the Internet. A few Web sites of interest include:
