Tags: dividend-reinvestmentplans | DRIPs | investors | stocks

DRIPs Give Small Investors Opportunity for Diversified Portfolio at Low Price

By    |   Tuesday, 08 Apr 2014 10:11 AM

Small investors can use dividend-reinvestment plans (DRIPs) to assemble a portfolio of high-quality, dividend-paying stocks while paying virtually no fees.

There are more than 1,300 companies that have DRIPs, says Vita Nelson, publisher of Moneypaper's Guide to Direct Investment Plans. In a DRIP, your dividends are automatically reinvested in shares (or fractional shares) of the company at no cost.

In the overwhelming majority of cases, you can enroll in a DRIP through the purchase of a single share, Nelson told Moneynews in an exclusive interview. The companies also allow you to buy additional shares through their DRIPs. In about 50 percent of DRIPs, you don't have to pay fees for the shares, she says.

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Many of the companies that do charge for share purchases have a $5 fee plus a certain amount per share. "Very small investors should choose no-fee DRIPs," Nelson says.

When you're buying additional shares (or fractional shares), most companies will accept as little as $25, she says. You can invest weekly or monthly, and a lot of DRIPs accept automatic transfers from your bank account. "We recommend that so you tune out the market," Nelson says.

"The virtue of the plans is that even the smallest investor can save in stock rather than in the bank," Nelson says. "You won't pay tax on the growth of your holdings until you sell." To be sure, you will pay taxes on your dividends, even though they are re-invested into the company's stock.

You can enroll in DRIPs by contacting participating companies directly or going through a group such as Temper of the Times Investor Services, of which Nelson is chairman of the board. Her group charges $30 per DRIP for members and $60 for non-members. Membership costs $100 a year.

If you enroll in a DRIP, your shares are held by the company's transfer agent rather than in your brokerage account.

Lance Roberts, CEO of STA Wealth Management in Houston, has been investing in DRIPs for about 15 years. He owns about 15 of them and advises clients about investing in them too.

"If used properly, you get tax deferral because you will hold the stocks for a long time and reinvest the dividends," Roberts told Moneynews in an exclusive interview. "But a good DRIP program only works if you contribute regularly" to buy additional shares, he says. "It's like a garden performs better if it's watered."

In addition, you have to resist the temptation to sell your DRIP stocks when they decline, Roberts says. "It's important as part of an investment program to say, 'This is long-term, I won't touch this money for 20 to 30 years.'"

Nelson notes that DRIPs allow investors to set up diversified portfolios with a very small amount of money. "You can set up your own mutual fund" with DRIPs, she says.

One downside of DRIPs, Nelson and Roberts agree, is tax accounting. Every time you buy shares of a company directly or with a dividend reinvestment, you are creating a new cost basis. And you must keep track of all these cost bases to figure out your capital gains tax if you sell the shares.

"At a brokerage firm they keep track of cost basis for you," Roberts points out. "This is difficult to track if you don't keep up with it. It's not an easy vehicle for tax planning. That's a major reason why many people don't use DRIPs."

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Small investors can use dividend-reinvestment plans (DRIPs) to assemble a portfolio of high-quality, dividend-paying stocks while paying virtually no fees.
dividend-reinvestmentplans, DRIPs, investors, stocks
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2014-11-08
Tuesday, 08 Apr 2014 10:11 AM
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