All About Direct Investment Plans (DRIPs)
Steve Jobs, founder of Apple Computers, advises people to “Think different.” But those two words of wisdom also apply to investing.
After all, there’s the “old way” and a “new way” to invest to build your wealth.
The “old way?” You buy your stocks through a broker, paying commissions and fees—probably buying with the crowd after prices have risen, then selling after prices started dropping. (Stock prices are always rising and falling.)
Mutual funds are also an “old way.” They’re expensive (transfer agent fees, custodial fees, administration fees, registration fees, not to mention those funds that charge front-end or back-end loads). They underperform (of the more than 8,000 funds, fewer than one in 10 beats the S&P 500 in any 10-year period). And you’ve lost control—because you’ve turned over responsibility for your financial life and future to someone else. If the manager(s) make bad decisions, then it’s your tough luck.
And what’s the “new” way? DRIPs, or direct investment plans. (New to most people but, actually, they’ve been around for years.) Here’s how they work, and why they’re an ideal way to build assets.
There are drips…and then there are DRIPs. The difference between them is huge.
The former can drive you nuts and keep you awake at night. The latter can preserve your sanity (to say nothing of your wealth) and contribute to a good night’s sleep.
Here’s a brief introduction to a little-known form of investing—and the many advantages that it offers.
What is a Direct Investment Plan (DRIP)?
Typically, when you invest in a stock, you buy a specific number of shares and go through a bróker—either online or over the phone. For this service, you pay a commission. When you sell, you’re facing another commission, and you pay taxes on your profits. (At a higher rate if you sell in less than a year.)
“Buying and selling”—which is speculation, not investing—is based on playing the stock market. You gamble that prices will rise, and you’re continually buying and selling on that assumption.
DRIP investing is very different, because it provides a means for you to add to your investment over an extended period of time. Of course, you can still sell whenever you wish. But the beauty of DRIPs is that you get more value for your investment dollar. You eliminate the broker and buy your shares directly from the company.
You pay a modest one-time fee to get enrolled, and for many fine companies you will not pay another dime ever again when you buy stock in that company. No fees…no commissions…nothing. In other words, every dollar you invest goes directly into your investment, which doesn’t get diluted by extra charges.
A “Direct investment plan” lets you cut out the middle-man, and this is particularly important if you are a small investor. After all, if you were making small, regular investments in several different companies through a broker, the commissions might cost more than the stock itself. A poor way to save!
How many companies offer direct investment plans? About 1,300 companies (among them the finest companies in America), assist shareholders by giving them the option to buy additional shares in this way. Plans vary by company, but they make investing very easy.
Once you are enrolled in a company’s DRIP, you can make additional investments by sending funds to the transfer agent with the tear-off portion of the statement that will be sent to you after each investment. In general, investments can be as little as $25 to more then $5,000. A growing number of companies will even let you debit funds automatically from a bank account.
Direct investment plans differ in another important way: You invest a cash amount and you end up buying whole and fractional shares. Say you want to invest regularly in PepsiCo, and say PepsiCo is currently selling for $56. If you were to invest $25, you’d end up with .446 of a share of PepsiCo.
And say you want to invest $25 a month in each of 10 companies. That $250 could be spread among those 10 companies, buying however many shares (and fractions) your $25 would buy of each company. Next month, or whenever you’d next want to invest again, you could repeat the process.
Dollar-Cost Averaging Made Easy
Because you invest a fixed number of dollars on a regular basis—regardless of how many shares those dollars buy—dollar-cost averaging forces you to buy more shares when the price of a stock is low and fewer shares when it is high.
This makes a lot of sense because, after all, the logical time to invest in a company is when prices are down. (And stocks are cyclical: Over a period of time, they go up…and down…and up…and so on.) And investing in a down market is not an easy thing to do–negative emotions are generally triggered by lower stock prices.
As long as a company’s prospects appear good, you should take advantage of dips in the market. Otherwise the stock market will be taking advantage of you — preying on your natural fears, while allowing more logical investors to buy the stocks that you may be rushing to sell.
Those who follow dollar-cost averaging with a well-diversified portfolio of stocks will be able to follow a more logical strategy of investing: They will buy more shares when stocks are at bargain prices. Such a systematic approach to investing will reward the patient, long-term investor.
A Safer Way to Build Wealth
Many people get burned as investors. They buy at the top and sell at the bottom. That’s because emotions play such a large part in investment decisions. And while it’s human nature to try to “beat” the market, it rarely works. DRIP investing can help you win this battle of emotions.
With wide diversification, when some of your stocks are lagging, others may be gaining. That way, you won’t feel so much pressure to sell the laggards. (On the contrary, you would want to be buying those shares when they are lagging, not selling them.)
With dollar-cost averaging, you can impose discipline on your investing. You decide in advance how many dollars you intend to invest, and how often. Then you continue on this schedule, regardless of the market price of your shares at any one time.
Such strategies help you withstand the impulse to buy or sell with the crowd. (Always a bad idea.)
Remember, stock prices move up and down. Although the stock markets have historically returned 10 percent to 11 percent annually, that average return includes many great years, along with a fair number of negative ones.
Consequently, patience is an important quality for investors—and dollar-cost averaging with wide diversification among companies and industries makes it easier to withstand the temptation to act impulsively.
How to Enroll is a DRIP
There are three ways (the third way is most convenient and efficient)
1. You can go through a traditional broker and buy the number of shares required by the company to qualify as a shareholder. Generally, the number is at least a single share of stock. Be aware that buying stock through your brokerage account generally means that the stock will be registered in “street name,” which is the name of the brokerage firm. You must ask for registration in your name, which will probably require that you have a stock certificate issued in your name. Once you have proof of ownership, you contact the company’s transfer agent to request enrollment in the plan.
2. Some companies also allow you to get enrolled directly through a company’s transfer agent. (But you should be aware that most companies that offer enrollment through the transfer agent charge fees for each investment through the plan. Such plans won’t serve your purpose as well as those that don’t charge fees.) What’s more, you generally will have to spend more than the amount for the single share to join the plan as a shareholder (generally, from $250 – $1,000).
3. The most convenient way to become enrolled (available for virtually every company with a direct investment plan) is through the enrollment service offered by Temper of the Times Communications, Inc. For one thing, shares are always purchased in the customer’s name–not “street name.” In addition, the enrollment service contacts the transfer agent on your behalf and gets the DRIP account set up. This frees the customer from having to deal directly with each transfer agent to become enrolled after first obtaining a certificate in his or her name, and brokers charge hefty fees for certificates!
Creating a DRIP Portfolio
How does one build a DRIP portfolio? Where do you start? One way is to identify companies with products and services you use and enjoy.
Then you should look farther afield, with an eye to establishing a well-diversified mixture. For example, oil stocks belong in most portfolios (The global economy depends on oil—even when prices are high, as they are now.) You can select from such household corporate names. And how about utilities? Everyone depends on electric power.
Many financial companies have DRIPs, and would belong in any small portfolio. Everyone has to eat, which is another of those basic facts of life, and there are many great food companies that have DRIPs. Your Benefits Administrator can provide a list of companies that offer DRIPs—listed based on the company’s investment sector. You may find it helpful to select companies from several sectors.
Just remember to always strive for high-quality companies, with brand name recognition that you believe have staying power for the long term. (Complete information as well as prospectus details are available to you at www.directinvesting.com.) Since you are not making a lump-sum investment, the timing of your purchase is not as critical as it otherwise would be.
Long-Term Investing = Tax Savings
Investing in stocks over the long term has provided far better results than earning interest on CDs or bank accounts. And DRIPs are the perfect vehicle for the small investor to invest in equities.
Stock market gains are taxed at a lower rate than “ordinary” income, and any tax from gains is deferred until you actually sell your stock, which may be many years down the road. Currently, capital gains are taxed at a maximum of 15 percent, compared with wages, interest, and even dividends, which are taxed at the individual’s “marginal” rate—and you know all too well how much the Federal government and the State taxes your income.
Conventional IRAs are taxed at ordinary income rates, once you begin withdrawals. So it makes sense to own income-producing assets—which will be taxed at ordinary rates anyway—inside your IRA or 401 (k). But you can’t neglect investing in stocks, and DRIPs provide the ideal vehicle to invest for capital gains.
The Temper Enrollment Service
Unlike traditional broker/dealers, the Temper Enrollment Service is dedicated exclusively to helping investors qualify for enrollment in direct investment plans. It is the only service that helps investors become enrolled in virtually every company that offers a plan.
Traditional brokers generally make a purchase in street name, which does not qualify the customer to join the plan as a shareholder of record with the company. In contrast, The Temper Enrollment Service buys the shares for customers and has them registered in the customer’s name. Unlike the fee-driven transfer agent direct-enrollment service, a Temper customer may become enrolled with the minimum number of shares to qualify. Temper collects no further fees after the enrollment process is complete.
DRIP investing is becoming more common for the many advantages it offers.
The Moneypaper and its affiliate, Temper of the Times Investor Services Inc., pioneered this field, writing about the advantages of DRIPs starting in 1984. The Temper Enrollment Service has opened more than one million DRIP accounts in over 1,000 companies. More than one million copies of The Moneypaper Guide to Direct Investment Plans have also been sold.
As editor and publisher of three highly respected financial publications, Vita Nelson has helped hundreds of thousands of investors gain knowledge of these plans by providing information about the simple steps to take in order to enroll and take advantage of the opportunities they offer.
Ms. Nelson has conducted seminars, appeared on TV and radio shows, and is the co-author of Create and Manage Your Own Mutual Fund (Lifetime Press, 1994). She is widely quoted in the press and has been cited as a source of information for individual investors by The Wall Street Journal, Barron’s, The New York Times, Los Angeles Times, Kiplinger’s, and the Boston Globe, among many others. Ms. Nelson is the acknowledged authority on the operations of company-sponsored direct investment plans (DRIPs).
If you wish to become enrolled in a DRIP, contact Temper of the Times Investor Services, Inc., a FINRA/SIPC member. You can call Temper at 1-800-388-9993, or email them at firstname.lastname@example.org. Temper can also be found online at www.directinvesting.com.