09/20/98
For the small investor
Tap into DRIPs
No money. No time. No experience. These are the three most common excuses people give for not saving and investing in the stock market. OK, but how many times do you stop at a fast food restaurant and drop $10 for a quick meal? How often do you rent videos? Add it up and you may find that if you give up one or two small expenditures, you, too, can afford to invest in the stock market. A DRIP may be the answer for many people who want to save for the long-term. A DRIP is a Dividend Reinvestment Program. These programs are offered by more than 1000 firms, according to Charles Carlson, certified financial advisor, author of "DRIP Investor Newsletter" and several books, including "Buying Stocks Without A Broker." "It may sound too good to be true, but there is a way to purchase stocks, in many cases, at a discount to prevailing market prices without paying brokerage commissions," Carlson said. "You can bypass the broker's bite when buying stocks by using corporate dividend reinvestment plans (DRIPs)." A DRIP is offered to shareholders who own at least one share of stock in a company. Shareholders of these companies are permitted to purchase additional shares by going directly through the firm or its transfer agent. Typically, the shareholder may choose to reinvest dividends and make additional voluntary cash payments into the plans to purchase more shares with small or no transaction fees. Even a small investor, someone with as little as $10 to $50 a month, can invest in some of the largest U.S. corporations including IBM, Pepsi, Wal-mart, Coca-cola, Bob Evans Farms, General Electric, Home Depot, Charles Schwab, and Campbell Soup Co.
Getting the first share Individual investors can purchase their first share of stock in a number of ways, according to Douglas Gerlach, creator and senior editor of Web sites including DRIP Central and Invest-O-Rama. Gerlach's Web site includes extensive information about DRIPs and offers links to several other financial sites. Gerlach suggests buying your first share of stock through organizations or companies specializing in single stock purchases. Gerlach says The National Association of Investors Corp. (NAIC) has a low cost plan that allows members to purchase a single share of stock in any of more than 150 companies for a one-time $7 setup fee in addition to the share price. After acquiring a single share, investors are automatically registered in that company's dividend reinvestment plans, allowing subsequent purchases in amounts as little as $10 up to $100,000. Another company that helps investors purchase a single stock is called First Share. Membership is $24 a year or $40 for two years. Of course, investors may purchase their first share of stock through a broker and pay the fees associated with the transaction. While some investors may feel comfortable owning one stock, Gerlach says people can diversify their holdings by purchasing in more than one company. "There are two schools of thought here. One is to pick a company, and invest regularly until you reach 100 shares; then pick another company and repeat the process," Gerlach said. "Personally, I think you should diversify your portfolio with eight to 10 companies across a range of industries, and then invest regularly by choosing one or two stocks that seem to be the best values at the time. Obviously, determining which stock is the best value gets to the core of stock selection, but every investor needs a strategy with which he or she can approach the market. Simply picking random DRIP stocks isn't enough." Advantages of DRIPs * Avoid brokerage commissions and fees. * Some companies offer discounts on market price of shares. * An investor can contribute small amounts to purchase fractional shares. This makes it practical to invest in more expensive stocks. * DRIPs allow investors to build a portfolio of stocks. * By investing a set amount of money at regular intervals you can achieve dollor-cost averaging. * Every individual has the affordable opportunity to invest in common stocks. Disadvantages of DRIPs * It is difficult to "time" the purchases or sales of stocks. * Dividends are reported as taxable income in the year paid even if the dividends are reinvested. DRIPs for the long-term DRIP investing may not be for everyone, especially those who rely on the advice of stock brokers or others, Gerlach said. "Remember that DRIP investing is best suited for long-term, buy-and-hold investors. When you invest in DRIPs, you should use funds that you've set aside to help you meet long-term goals," Gerlach said. "In many cases, it's a complicated and lengthy process to sell shares in a DRIP account, so you can't quickly get your hands on cash from your DRIPs. That's okay because you should have a long-term perspective whenever you're investing in the stock market, anyway!"
By TAMARA A. PATZER
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