Mutual Funds vs. Dividend Reinvestment Programs (DRIPS)
(Apples versus Oranges - You make the choice) - February 3, 2003
(Part 2 of 2 Parts)
by Steve Gail
In our last article we had just examined the true bottom line and hidden costs of a mutual fund purchase. As a brief reminder, we learned from the previous article, that Mutual Funds in addition to a sales charge sales charge ( whether Front end loaded [Class A shares ] or back end loaded [ Class B shares ] )carry other fees such as management fees, operating expenses, 12-b-1 trailing fees ( paid to brokers ) and marketing fees. As much as 6% or more can be taken from the gross investment just from sales charges and fees alone during the initial year. A pretty hefty hit to take on any investment and that maximum is realized on any sum that is less then a $25,000 initial purchase. How, let's examine the fees of our Dividend Reinvestment Program (DRIP).
Initially, the Dividend Reinvestment Program looks like it has very little charges associated with its implementation. However, on a more cursory examination we will find because of the small amount of shares that we are accumulating that the fees, which look to be so insignificant at a glance, tend to add up to be a lot more extensive then one might have been led to believe. Let's take a look at a hypothetical situation with a Dividend Reinvestment Plan. Let's say we set up a DRIP Plan with the ZYX company which is currently selling for a price of $20 a share and XYZ pays an annual dividend of $0.60 cents (which is $0.15 cents a quarter) and additionally had an automatic investment program of $50 a month and charges a flat 5% charge on new share purchases. Even if we assume that the dividends were being reinvested with no fee charged and only the auto reinvestment of cash is charged 5% ( without a minimum ) Then the following scenario could be observed.
( SEE EXHIBIT A BELOW )
( See exhibition B below )
Note the difference with fees added up to .68 cents a share and a difference of 1.54 shares. Now remember this is only assuming the automatic cash reinvestment portion of the DRIP is being charged a fee, if the DRIP also charges fees for normal stock dividends the fee structure would be even higher. The point to realize here is that you have to examine each DRIP that you select and calculate just how much you actually pay in DRIP fees versus the fees involved in a Mutual Fund transaction. There is no right or wrong answer, just a little bit of research and math that need to be done and that will go a long way in making your final determination as to which way to go. So is there an answer to the Mutual Fund vs. DRIP controversy? Or maybe its just one of those "which came first, the chicken or the egg discussions. Only your research can come up with a definitive answer. But it certainly is something that requires some thought.
So until next time,