DRIP Investor

Investing Basics

Buying Stocks Without A Broker Using Dividend Reinvestment Plans
Nuts And Bolts
Getting The First Share
No-Load Stocks
Online Enrollment
Buddy System
Sell Stocks Via DRIPs
Foreign Companies With DRIPs
Choosing A DRIP
About The Directory

Buying Stocks Without A Broker Using Dividend Reinvestment Plans

Dividend Reinvestment Plans (DRIPs) are programs which allow current shareholders to purchase stock directly from the company, bypassing the broker and brokerage commissions. Investors purchase shares with dividends that the company reinvests for them in additional shares. Most DRIPs also permit investors to make voluntary cash payments directly into the plans to purchase shares.

DRIPs have many attractions for individual investors:

• Many companies charge no commissions for purchasing stocks through their DRIPs, and those that do charge only a nominal fee.

• A number of companies have DRIPs which periodically permit participants to purchase stock at discounts to prevailing market prices. These discounts are usually 3 to 5 percent.

• Most DRIPs permit investors to send optional cash payments (OCPs), in many cases for as little as $25 to $50, directly to the company to purchase additional shares. If your investment isn’t enough to purchase a whole share, the company will purchase a fractional share, and the fractional share is entitled to that fractional part of the dividend. OCP gives small investors the ability to buy attractive blue-chip stocks when they otherwise might not be able to afford them.

Once you have identified a company with a DRIP, in some cases you have to become a shareholder of record to enroll. This is an important point. You must have the stock registered in your name, not brokerage or “street” name. Once you are a shareholder of record, contact the company for a DRIP application and prospectus. The prospectus provides all the details about the program, including fees, if any; optional cash payment minimums and maximums; investment dates; and eligibility requirements. Chances are, the company will probably contact you once it has your name as a registered shareholder.

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Nuts And Bolts

Although DRIPs are fairly straightforward investments, investors should be aware of the following nuts and bolts:

• Many DRIPs do not charge any fees to participate. However, there is a trend developing in the industry toward the implementation of fees for purchasing shares through the plans. These fees are usually $1 to $5 flat fee plus $0.05 to $0.10 per share fee. It is important that you know what the fees are before joining the DRIP.

• Know the number of shares needed to enroll in the DRIP. Most plans require only one share. Since it costs money to service DRIP investors, it’s not surprising that companies are raising their minimums in order to weed out those individuals whom they feel are “marginal” investors. Check with the company beforehand concerning share requirements for enrollment so there are no surprises when it comes time to join the program. The good news is that more and more DRIPs are allowing investors to make even their initial investment directly.

• DRIPs differ between companies. Some DRIPs purchase stock with optional cash payments once a month, while others do so once a quarter or even once a week. The timing of purchases may differ. Some firms buy on the first business day of each month, while others purchase stock on the 15th of each month. Some DRIPs permit investors to take possession of some of their dividends and reinvest the remainder, while others require that all dividends are reinvested. Some programs allow individuals to make optional cash payments without reinvesting dividends, while others do not. How do you find out the particulars? Call the company, talk to the shareholder relations department, and get a copy of the plan prospectus. Eligibility requirements and fees, if any, are highlighted in this directory.

• Dividends that are reinvested for additional shares are still considered income for tax purposes. The 1099 form that you receive from the company each year gives you this information. Also, DRIP investing requires maintaining good records, especially to determine the cost basis of stock for tax purposes when it comes time to sell. Companies and their transfer agents provide regular statements which help investors keep track of the DRIP holdings, and plan administrators are now required to provide more cost-basis information.

• Investing in DRIPs limits your flexibility to some extent. For example, shares are sometimes purchased weekly but in some plans only once a month. Let’s say you like a stock at today’s price. By the time the stock is purchased with your optional cash payment, the stock may have risen in price. The ability to transact a buy with the speed that is possible through a broker is lost in a DRIP. The same is true on the sell side, when it may take five trading days for a sell transaction to be conducted. That’s why the programs are suited for long-term investing and not trading. Over time, fluctuations in price should even out and not have much of an impact on your portfolio’s performance.

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Getting The First Share

A potential stumbling block to joining a DRIP is that in some programs you already have to be a shareholder of the company in order to enroll. Brokers offer one avenue for getting that first share, although the fees to purchase one share of stock will be quite high in percentage terms of the total investment. However, investors should realize that once the initial investment is made through the broker, they will never need a broker again to purchase stock in that company. If you buy the initial share from a broker, make sure the share is registered in your own name.

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No-Load Stocks

Another way to get the first share is by going directly to the company for initial purchases. These companies, which we call direct-purchase plans or No-Load Stocks,TM come in two types: those which are open to all investors and those which are open only to corporate customers or residents in the state or states in which the company operates.

Investing in no-load stocks is as easy as investing in no-load mutual funds. All it requires is calling or writing the company and requesting information and an application. Once the information is received, investors merely have to fill out the application form and return it to the company along with their check for the initial investment. Some direct-purchase plans have initial investment minimums of as little as $50. Following the initial investment, investors may make additional purchases with optional cash payments and reinvested dividends. In some cases, the companies charge no fees for these services, and those that do have only nominal fees.

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Online Enrollment

One alternative to calling the toll-free numbers is to go online to obtain enrollment information. A good starting point is the company’s own website. To find the company’s website, go to Google search engine (www.google.com) and enter the company’s name. Google should provide the company’s website. You can also try to find the company website simply by putting the company name in a Web address – www.(company name).com. Once you are at the company’s website, click on “investor relations,” frequently in the fine print at the bottom or upper right of the home page. At the investor relations part of the site, the company will usually provide some discussion about its dividend reinvestment plan and provide a link to its transfer agent. It’s quite possible that the firm will allow you to download the enrollment information right off its site.

Another starting point for obtaining enrollment information is the company’s transfer agent. Transfer agents administer DRIPs and direct-purchase plans for companies. The leading transfer agents include:

American Stock Transfer and Trust (www.amstock.com)
Broadridge (stockplans.broadridge.com)
Computershare (www.computershare.com/investor)
Wells Fargo (www.shareowneronline.com)
Registrar & Transfer Co. (www.rtco.com)

Once you arrive at the transfer agent websites you should be able to follow links to the plans that the agent administers. In many cases, enrollment information is available for downloading. Also, some transfer agents will allow investors to buy stock directly on the transfer agent website.

Now, if you don’t have a computer, you may want to visit your local library to gain online access to download forms. If that is not an option, try a friend.

In addition to obtaining enrollment information online, a number of companies also allow individuals to buy shares via the Internet at the plan administrator websites.

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Buddy System

Investors may also obtain the first share via the “buddy system.” For example, let’s say that someone you know has stock in Walgreen. You can go through Walgreen’s transfer agent to have your friend transfer one of his or her shares into your name. After the transfer, you are now a shareholder of record and able to participate in the DRIP.

A variation of the buddy system is getting perhaps five investors together to purchase a total of five shares in a company. Splitting up the brokerage commission on a five-share investment makes each investor’s commission relatively small. Following the purchase, go through the transfer agent and have the five shares transferred into the individual names of the five members of the group. Once this is done, each investor may enroll in the DRIP and begin making investments with reinvested dividends and optional cash payments.

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Sell Stocks Via DRIPs

Dividend reinvestment plans not only allow you to buy stock directly, but they also allow you to sell directly. Some companies may require sell instructions in writing, while others allow investors to sell via the telephone or online via the Internet. The plan prospectus provides all the details pertaining to selling stock in a DRIP.

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Foreign Companies With DRIPs

A number of foreign companies offer DRIPs, providing U.S. citizens an easy and inexpensive way to invest in foreign stocks.

Historically, overseas investing was pretty much the private domain of institutional investors with access to foreign exchanges. However, that situation has changed with the growth of American Depositary Receipts, better known as ADRs.

ADRs are issued by U.S. banks against the actual shares of foreign companies held in trust by a branch or correspondent institution overseas. Oftentimes, ADRs are not issued on a share-for-share basis. Instead, one ADR may be the equivalent of five or ten ordinary shares of the company.

ADRs have become popular in recent years. One reason is convenience. Investors can buy and sell ADRs like ordinary shares, eliminating the need for currency translations. Commissions to purchase ADRs are smaller than would be charged if the securities were purchased on foreign markets.

Although ADRs offer plenty of pluses for investors, there are some things to consider before investing. Currency fluctuations will impact ADRs. When local currencies strengthen versus the dollar, the return on the ADR is boosted. Thus, if you own shares in a country whose stock market is rising and whose currency is strengthening against the dollar, you’re getting a double-powered boost to your portfolio. Conversely, if the dollar is strengthening against the nation’s currency of your ADR, returns will suffer.

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Choosing A DRIP

Of course, just because a company offers a DRIP doesn’t make it a good investment. The bottom line with any investment is the quality of the firm’s financial position, prospects for earnings growth over the next several years, dividend-growth potential, and the strength and defensibility of its industry position. These factors need to be assessed before buying any investment. Chances are, with more than 1,000 U.S. and foreign companies offering dividend reinvestment plans, at least a few of the companies that survive your investment-selection process will offer DRIPs. 

Investors who desire regular coverage of the DRIP field should subscribe to DRIP Investor (7412 Calumet Ave., Hammond, IN 46324-2692). The newsletter, published by Horizon Publishing and written by Charles B. Carlson, CFA, has a special focus on new DRIP plans as well as new “no-load stocks.” A one-year subscription for the monthly newsletter is $109 per year and may be ordered by calling (800) 233-5922.

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About The Directory

The directory listings provide a plethora of information — addresses, phone numbers, stock symbols, business profiles, and DRIP specifics. Nearly all of the listings provide a performance rating to help steer toward the best stocks and away from the worst.

Here are some things to consider when using the directory:

• The performance ratings range from the highest (*****) to the lowest (*). In the case of some firms, I lacked sufficient corporate information and financial data on which to rate the companies. These firms were not rated (NR).

The ratings were determined by a number of factors. A company’s Quadrix® Overall score was considered. Quadrix is Horizon’s proprietary stock-rating system that rates more than 4,600 stocks. Each stock is ranked on more than 90 different variables.

Financial strength carried weight. Companies with high debt levels usually found themselves receiving one or two stars. Since investing with DRIPs is a long-term proposition, you want companies that will be able to stay in the game. Heavy debt burdens often make for an early exit.

Earnings, sales, and dividend records were also important in assigning ratings. Firms with consistent sales and earnings growth were rated higher than firms where profitability has been inconsistent. Companies with records of steadily increasing dividends usually fared better in the ratings than those in which dividend growth has been erratic or where dividend cuts or omissions have occurred. Safety of the dividend was a key point.

The stock’s relative strength performance was a factor as well. Indeed, stocks with price momentum scored higher.

The company’s industry weighed in the ratings. The long-term prospects of the industry were important. Cyclical industries did not fare as well as growth industries.

Finally, the ratings were based on the issue’s overall suitability for investment via a DRIP. This analysis considered such factors as the competitive nature of the industry, the potential for technological obsolescence, and the projected volatility of the stock.

New investments should be focused in four- and five-star companies. A two-star rating should force you to take a closer look at the firm and its prospects.

• Unless stated otherwise, assume you need to own one share in order to be eligible to join the DRIP. If a company offers a direct-purchase plan that permits initial purchases, it is noted in the Plan Specifics.

• The DRIP ratings consist of a “thumbs up” for acceptable programs or a “thumbs down” for unattractive DRIPs. Factors taken into account when assigning this rating include the ease of enrolling in the program; the fees, if any, of investing through the DRIP; the availability of special services, such as IRAs and automatic investment services; and the frequency of purchases with optional cash investments. Please note that a firm that charges a fee to reinvest dividends almost always received a “thumbs down” rating. Remember that is not a rating on the investment merit of the stock.

• Each listing features the stock exchange on which the issue trades (NYSE: New York Stock Exchange, AMEX: American Stock Exchange, and NASDAQ: Nasdaq National Market.)

• Unless specified in the company’s Plan Specifics, you can assume that a company picks up all costs and fees for purchasing stock in its DRIP.

• OCP is the abbreviation used for Optional Cash Payments — the voluntary payments that shareholders may make directly into the DRIP in order to purchase additional shares. Each listing indicates how frequently OCPs are invested by the company. If a dividend reinvestment plan doesn’t offer OCPs, this is indicated by “not available” in the Plan Specifics.

• Some dividend reinvestment plans permit partial dividend reinvestment. This option allows participants to receive dividends on part of the shares held in the plan while reinvesting dividends on the remainder. This option is addressed in the Plan Specifics.

• When possible, specific selling costs are given. The fees provided are for “batch selling.” Some DRIPs permit market orders for selling but charge higher fees than for batch selling. Plans in which investors must go through their own broker to sell stock are highlighted in the Plan Specifics.

• Often, the best source of information about a particular plan is the plan administrator. Therefore when possible, a toll-free number for the DRIP plan administrator is listed. In addition, a direct phone number to the company is provided. If you call the company for information, ask for the shareholder services department.

• Each listing will indicate if a discount is available in the dividend reinvestment plan, the amount of the discount, and whether it applies to just reinvested dividends or both reinvested dividends and optional cash payments.

• Each listing provides the dividend payment dates for the stock. While most DRIP investors reinvest their dividends, many DRIP investors like to receive at least some of their dividends in cash and thus may find this information particularly helpful. This information is especially useful for building a DRIP portfolio in which dividends are paid every month.

• Each listing includes the company’s website address. Company websites offer a bounty of useful information.

To purchase the Directory of Dividend Reinvestment Plans, click here.


Final Word

Companies frequently change certain aspects of their plans. For example, firms might drop the discount, lower the maximum amount of optional cash payments, change eligibility requirements, or implement a service charge for administering the plan. Thus, it is critical that investors consult with the company and obtain a current prospectus before investing.

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Commentary

8/25/14
Low Volume Days

Charles Carlson, CFA
Editor, DRIP Investor Newsletter


Around this time each year I usually warn investors not to put too much emphasis on market action over the next few days. . .

Read more . . .