Wednesday, August 29, 2007

How To Get Started With Dividend Reinvestment Plans (DRIPs)

DRIPs are a great way for a new investors to get started and to build up a steady stream of dividend income. They allow you to purchase stock directly from the company. The plans allow an investor to automatically reinvest their quarterly dividend directly in the underlying stock. Many companies offer DRIP's, allowing investors to build a diversified portfolio of quality stocks. In most cases, DRIPs are administered by a transfer agent which is responsible for the record keeping of purchases, sales and transfer of shares. Some DRIPs may charge a one time new account set up fee and a fee to make additional purchases or sales of shares. Some plans may also charge a small fee to reinvest dividends but most often without a cost. DRIPs allow you to purchase partial shares when you send in a specific amount of money such as $100. Make sure you read the stock plan prospectus before you invest to understand the costs of the plan. Keep in mind, taxes are still owed even if your dividends are reinvested.There are three types of plans.

The most restrictive DRIP only allows you to reinvest your dividends, typically at no additional charge. This plan does not allow you to make any additional purchases or make your first purchase and you must own shares of the stock before you can join the plan. You must purchase your first share with a broker and then move it to the transfer agent for that particular company. Check with the brokerage firm on the cost to transfer a share of stock to a DRIP before you make a purchase. Citigroup (C) is one such DRIP.

Another type of DRIP allows you to reinvest your dividends and make additional purchases of shares on a regular basis. These plans require you to own one or more shares of the stock before joining the plan. This again means you must purchase a share of the stock from a broker and move it to the transfer agent. Examples of this type of Plan our Johnson & Johnson (JNJ).

The third type of plan is called a DRIP and Direct Purchase Plan (DPP) / Direct Stock Purchase Plan (DSPP). These plans allow you to make your first payment directly with the plan and avoid using a broker altogether. These plans also allow you to reinvest your dividends as well as making additional purchases of shares. An Example of this type of plan is ExxonMobil (XOM).

Advantages You can start most DRIP's by purchasing one share of stock or a small lump sum investment. Most DRIPs offer a low cost alternative to purchasing shares through a broker and are a cost effective way to build a diversified dividend portfolio. Most DRIPs only charge a nominal fee to purchase additional shares. DRIPs are a great way to dollar cost average into a stock and help novice investors develop a long term investment horizon.

Disadvantages Investors must track their cost of shares to be used to calculate capital gains tax when shares are sold. You have little control over the date of purchase or sale transaction. Some DRIPs allow for purchases on only one or two set days a month while others offer more regular investments dates.

DRIPs to Consider

DRIPs requiring share purchase
Johnson & Johnson (JNJ) JNJ Transfer Agent Computershare
Wrigley (WWY) WWY Transfer Agent Computershare
PepsiCo (PEP) PEP Transfer Agent Bank of New York

Direct Purchase Plan DRIPs
Pfizer (PFE) PFE Transfer Agent Computershare
General Electric (GE) GE Transfer Agent Bank of New York
ExxonMobil (XOM) XOM Transfer Agent Computershare
Bank of America (BAC) BAC Transfer Agent Computershare
IBM (IBM) IBM Transfer Agent Computershare
McDonald's (MCD) MCD Transfer Agent Computershare
Newell Rubbermaid (NWL) NWL Transfer Agent Computershare

Links
DRIP Central
DRIP Investor
DRIP Investing
DRIP Advisor
Additional information on DRIPs and purchasing your first share
Basic Tax Info on DRIPs

Transfer Agents
Computeshare
Mellon Bank of New York
American Stock

The Div Guy owns shares of C, JNJ, XOM, WWY, PEP, PFE, GE, BAC and NWL

3 comments:

j2r said...

do you see any advantage of using a transfer agent instead of a broker?

my broker allows me to reinvest dividends in most of my stocks at no extra cost.
Plus I can buy more stocks anytime I want, and it's also easier to track the cost come tax time.

Div Guy said...

I started the DRIPs a few years ago. I now use Zecco for any new stock I purchase but I have kept the DRIPs with the transger agents. I also like the ability to purchase any stock I want from dividend of a different company. I would go with the brokerage account as well. Have you started an account at Zecco. They don't have very much research but you can't beat the free trades.

PENNY STOCK INVESTMENTS said...

Drips are a great idea.