DRIP - Dividend reinvestment plans cut out the middlemen

PAUL B. FARRELL
Best-kept secret on Wall Street
Dividend reinvestment plans cut out the middlemen
By Paul B. Farrell, MarketWatch
Last update: 6:57 p.m. EDT April 10, 2005
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ARROYO GRANDE, Calif. (MarketWatch) -- Don't trust brokers? No confidence in fund managers? Cut out the middleman. Here's how: Buy stocks directly from a company. Become one of America's DRIP investors.
Never heard of them? I'm not surprised. Vita Nelson, editor of the Moneypaper newsletter, calls corporate dividend reinvestment programs, or DRIPs, the "best-kept secret on Wall Street."
Most people haven't heard about them for one simple reason -- companies can't advertise their DRIPs. Why? Because brokers and fund managers can't sock you with big fees and commissions if you buy stocks directly from a company. So they won't tell you the "best-kept secret" and they've made sure Congress and the SEC keep it a secret too.
But I can tell you. DRIPs are a great way to get on the dividend bandwagon. DRIPs are a simple way to invest dollars and reinvest dividends. DRIPs are a great long-term saving plan that can help you build a retirement portfolio of solid blue-chips.
And it's "so easy," says Charles Carlson, editor of the DRIP Investor newsletter and author of several books on investing, including "Buying Stocks Without a Broker" and "No-Load Stocks" (another buzzword for DRIPs), both great primers for the new DRIP investor.
More than 1,000 major companies offer DRIPs, including Coca-Cola (KO:
The Coca-Cola Company
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KO 59.33, -0.92, -1.5%) , Disney (DIS:
Walt Disney Company
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DIS 32.36, +0.42, +1.3%) , Exxon Mobil (XOM:
exxon mobil corp com
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XOM 92.46, -0.14, -0.1%) , Home Depot (HD:
Home Depot, Inc
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HD 29.78, +0.86, +3.0%) , Pfizer (PFE:
Pfizer Inc
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PFE 20.43, +0.39, +2.0%) and Walgreen (WAG:
Walgreen Co.
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WAG 35.49, -0.33, -0.9%) . Plus great foreign brands like AXA, BP, Barclays, GlaxoSmithKline and Toyota, all administered through ADRs by American banks, also offer DRIPs.
"In the Dow, Exxon has perhaps the most user-friendly DRIP," Carlson says. "You can make initial purchases directly. Minimum initial investment is $250. There is no enrollment fee and no purchase fees. The Exxon plan also has an IRA option, including a Roth IRA."
And you have to love Carlson's eight-stock "starter" DRIP portfolio. This winner had an 18.8% average annual return the past 10 years, handily beating the S&P 500's 10.3% percent average. Put another way, if you invested $1,000 in each of these stocks 10 years ago -- a total of just $8,000 -- your portfolio would have grown to a loveable $45,040 today.
The portfolio includes Medtronics (MDT:
Medtronic, Inc
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MDT 49.42, -0.04, -0.1%) , Popular (BPOP:
popular inc com
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BPOP 11.85, +0.06, +0.5%) , Walgreen, Pfizer, Dollar General (DG:
DG
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DG, , ) , Exxon Mobil, Regions Financial (RF:
regions financial corp new com
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RF 22.22, +0.36, +1.7%) and Disney. See accompanying chart.
And if you don't have $8,000 to start, Carlson suggests an even simpler four-stock portfolio with a super-low initial investment: Popular, Exxon Mobil, Cash America (CSH:
Cash America International, Inc
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CSH 48.21, +2.76, +6.1%) and Aqua America (WTR:
aqua america inc com
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WTR 18.04, +0.05, +0.3%) : "Buying into these four stocks costs you just $1,100 to start. And all of your money goes to work for you, no enrollment fees and no purchase fees."
Eight stocks may not be enough diversification for your needs. And you may still want some bond funds to build a balanced portfolio for your lifestyle. Carlson's books are filled details about asset allocations, company picks and alternative portfolios to fit all kinds of lifestyles, from young families to mature retirees.
Where to begin
How to get started? You need at least one share of stock to start (DRIP programs are only available to existing investors). There are three great organizations that will show you how to buy that first share or help you find one of the 300 companies that will let you get started buying that first share directly: DRIPinvestor.com, NetStockDirect.com and Moneypaper.com. Visit DRIPinvestor.com. See NetStockDirect.com. Check out Moneypaper.com.
According to these experts, building your stock portfolio using DRIPs is about as easy as opening any other account. Here are Carlson's eight steps for getting started in DRIPs:
Select the best companies
Research the plan's specifics before investing
Buy the first share of company stock
Wait for the stock certificate
Tell the company you want join their DRIP plan
Fill out and return their DRIP enrollment form
Know the rules about making cash payments
Keep good records
After you make your initial investment, you then add to it on a regular monthly basis. In fact, you can make it even easier by setting it up as an automatic deduction from your bank account. And today most transfer agents allow buying in DRIP plans via the Internet.
One drawback to some of the plans, says Carlson: "In recent years we see more companies with no-load stocks implementing fees in the plan. These fees are generally $5 to $18 for enrollment fees and purchase fees of $5 plus $0.10 per share."
Still, that's better buy than paying all the commissions, fees, trading costs and annual operating expenses the middlemen siphon off.
Big savings: no loads, no fund expenses
With DRIPs you can save upfront loads plus those endless annual management fees of 1.5% to 3% you have to pay your broker to buy the stocks and then hold onto them indefinitely.
Plus you'll save even more by buying stocks directly and not investing in a mutual fund. Remember, the fund simply turns around and invests your money in stocks and then charges an average 1.4% annual fee.
Think of it this way, you're creating your own private fund of DRIP stocks. You cut out all the broker's loads and you've eliminated the fund's operating expenses. And on top of that, you'll likely outperform Wall Street's hotshots and the vast majority fund managers.
Simple! But don't tell anyone. Remember, DRIPs are Wall Street's best-kept secret.
Company
10-year growth of $1,000 DRIP
Medtronics
$7,501
Popular
$10,435
Walgreen
$5,563
Pfizer
$4,806
Dollar General
$4,411
Exxon Mobil
$4,429
Regions Financial
$3,934
Walt Disney
$1,965
Total
$45,046