by Steve Gail
DRIP... DRIP... DRIP... - No, its not a type of coffee grind, nor the sound of water, but its a sure fire way to get you to appreciate the "long-term" philosophy of investing in common stock with very little capital. DRIPS, better known as Dividend Reinvestment Plans are made for just that, a way to get the small investor into a habit of long term investing. Drips are offered by companies to shareholders that allow those individuals to buy stock in nominal amounts from the company. These plans allow their shareholders to invest their dividends ( partially or in their entirety ) into the purchase of more of the company's stock.
While there may be many reasons that these plans may be beneficial, the first thing that catches your attention is that you are not required to invest a large capital outlay, and many owners of these accounts have only a handful of shares in them.
These plans allow shareholders to reinvest their dividends at usually no cost to buy additional shares of the underlying common. In addition, many of these plans allow their shareholders to purchase additional shares through a program called an "Option Cash Purchase Plan" or a ("OCPS"). This plan allows an investor/shareholder to make purchases of company stock for a very nominal amount. There are plans that allow the purchase of as little as $20, $15, $10 or less. Even though many of these plans charge a fee to the shareholder to purchase these additional shares; but these fees, at best, are nominal, if at all.
The "Long Term" Outlook
The important concept that should be noted here is that these DRIP plans force an investor to think with a "Long-term" frame of reference, because one is reinvesting dividends on a regular and consistent basis using small amounts of money. This "regular and consistent" investment simulates the process that a lot of long term mutual fund buyers practice, which is the concept of "dollar-cost-averaging"
Kinds of DRIPS
Dividend Investment Plans are managed several ways, depending on which organization is handling the transactions. There are three (3) basic types of DRIPS.
Brokerage firms will let investor/shareholders to reinvest dividends at no cost. But the problem with the brokerage accounts, are that they DO NOT allow you to purchase any additional shares with cash, only dividends can be used to purchase shares. While the brokerage firms may allow you to reinvest dividends in companies that do not have a DRIP plan, they lose the optionable ability to purchase additional shares in cash, which is the appealing feature of any DRIP plan.
These are DRIPS that are offered directly through the sponsoring company and in which they allow you to purchase them directly.
These company run DRIPS are usually part of an shareholder-relationship program. Some of these companies even go as far as to offer their own Individual retirement accounts, in conjunction with the DRIP program.
As the number of DRIPS grew and the amount of paper increased, companies found a need to utilize transfer agents to handle the transactions and to simply a process that at times could become quite overwhelming. These third party agents can streamline the process for many companies, with many shareholders, hence making the operation of the DRIP plans much more simpler to administer.
During the weeks ahead, I plan to introduce you to numerous issues that one should consider when implementing any type of DRIP plan. In the future weeks we will cover areas that include, the ramifications on DRIPS if the Bush Tax relief plan passes with exclusion of Taxation on Dividends. We will also examine DRIPS of Utility Companies, and the record keeping that goes into to keeping an accurate cost basis when you have to ultimately determine capital gains. Just a note to remember, dividends paid out four(4) times a year with a different cost basis. We will deal with issues like this in upcoming articles. We will also offer you on Monday's our "DRIP OF THE WEEK", which will be a stock issue that offers a DRIP plan where we believe that the underlying issue will offer some sound fundamentals, while examining it's dividend return in relationship to the plans fees and costs. Every Monday we will highlight a company with a DRIP Plan that hopefully brings a favorable awareness to your attention when hearing about it.
Remember, no matter what the outcome is of the proposed Bush Tax bill, DRIPS will still offer a very low cost investment vehicle for the long-term investor who wishes to invest in quality companies instead of having their money in the losing proposition of a money market or cash fund.
I hope all of you will join me weekly for articles that will perk your interest and maybe even pickup a few ideas on stocks that you might want to place in your DRIP plan. So in closing may I leave you with this thought, "May Dame fortune smile upon you always, but never her daughter miss fortune."
Until next week