DRIP Stocks
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Thomas K. Hedge D.D.S., F.A.C.E.
Pending Publication
I am surprised at the number of my dental colleagues and friends that have never heard of Dividend Reinvestment Plans or DRIP's. These plans allow individuals to purchase shares of stock for little or no transaction fees. The reason that most people do not know about these plans stems from the fact that there is little or no transaction fee. There is no commission or management fee for a mutual fund advisor. Therefore, there is no one to advertise these plans. The most common motive for advertising is profit. If there is no profit, there will be no advertising.
DRIP plans are administered either by the company issuing the stock or a plan administrator. Funds are received from individuals either by check or direct debit from a checking account. These funds are then used to purchase shares of stock at the value that they are trading at on that day. These shares are held in the individual's account. Statements are issued either monthly or quarterly. Dividends can be automatically reinvented. Contributions can be as little as $25 or as great as $10,000 per month.
Lets look at the benefits of automatic investment through monthly checking account debits. First, this employs a tactic known as dollar cost averaging. The price of an individual security will swing up and down as the overall trendline is up. When purchases occur as the price trends down, more shares are purchased for the same dollar amount. As the price trends up, you get fewer shares per transaction, but the value of your entire account goes up. You win in either scenario.
The second benefit involves market timing. Whenever I am about to make a sizable investment in the stock market, I am always uncomfortable about whether this is the right time. How many times have you purchased a stock or mutual fund and watched your investment drop as the market trended down over the short term. For instance, Dell Computers dropped 10 ½ points yesterday to 89 7/8 from over 100 the day before. If you had invested on Thursday, you would be down ten per cent in one day. You would be kicking yourself for not waiting one more day. Automatic investment removes this emotional component. Investments are made every month, minimizing the rocky road of volatility in the markets.
There are over 900 companies that offer DRIP plans. These include the likes of AT & T, Exxon, Proctor & Gamble, Intel, McDonalds, Walmart, Bank America, and Johnson & Johnson. This allows us to set up our own mutual fund with a collection of stocks in diversified international markets. If you can eliminate the the average two per cent fee that mutual funds charge in loads, 12b and management fees, your returns can increase dramatically. A ten thousand dollar investment over thirty years will be worth $53,800. If we can increase our yield by two per cent by eliminating fees, our investment will be worth $92,400. This small increase in yield has a very significant impact on portfolio value.
A good source for more information on DRIP plans is the DRIP Investor, a newsletter written by Charles Carlson. This newsletter has a subscription rate of $79 per year. You can order a subscription by calling 219-852-3220 or visit their website at www.dripinvestor.com. Mr. Carlson has also recently published two new books, The Individual Investor Revolution, and Chuck Carlson's Sixty Second Investor.
