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 websites of interest include:
Some of our listeners have also told us about a website for small investors that allow you to buy odd-lots of stocks, similar to a DRIP plan: www.BuyandHold.com.
This article is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
