In Focus

Could You Fall In Love With a DRIP?

When our Head Hen gave each of our club members the assignment to find out if the stock we track DRIPs, she wasn't talking about a post-nasal problem. In fact, despite the rather distasteful name, DRIPs can be quite positive and not as complicated as I first thought. The complexities I discovered were all the misnomers and acronyms used to describe an otherwise simple concept. Once again, this Chick used a little internet research to find simplicity.

As you've probably guessed, DRIP is an acronym. It stands for Dividend Reinvestment Plan. Now, that part of it is pretty self-explanatory. As you may or may not know, some companies reward shareholders with a small cash payment per share, on a quarterly basis, known as a "dividend." Think of it as profit-sharing: they are giving you a teeny tiny percentage of their earnings. A DRIP has to do with what you do with that cash reward. Obviously, you could do nothing and just have it sit idly in your money market brokerage account, or you could get Chicky with it and have that money work for you. The value of reinvesting even the smallest of cash dividends cannot be stressed enough. Based on the average annual return of the stock market (11%), it's hard to argue that reinvestment isn't the best option.

At this point I began to get confused. In my own brokerage account, I have always reinvested my dividends. I think it was a little box I checked on my original application when opening the account. Was I already DRIPping and didn't know it? I made a call to my broker to find out. (You see, being a Chick also gives you the courage to make these kinds of calls!) I found that, in effect, I am DRIPping. My brokerage allows their customers two choices, free of charge. Either the dividends in an entire account can be reinvested or just the dividends from particular securities (i.e. stocks). Well then, if this is something I can already do for free, why in the world would I need to enroll in such a plan with a company directly? (Granted, some brokerages may charge a fee for this option.) Lo and behold, I discovered the tricky part. There is more under the DRIPpy umbrella than just dividend reinvestments! Here comes the onslaught of multiple acronyms! In my research, I read about DIPs, DSPs, OCPs and SPPs, all meaning pretty much the same thing -- the ability to buy additional shares of stock directly from a company without the expense of broker commissions.

Before I explain this option in more detail, a brief lesson in how DRIPs came about in the first place might provide a bit more clarity. A century ago, companies began allowing their employees to buy stock in the company and reinvest their dividends, often at a discount. Many companies decided to pass along this same benefit to their shareholders. Over the years, companies that did not offer dividends decided to offer DRIPs anyway. Of course, this meant only offering the direct investment option, allowing employees and/or shareholders to purchase additional shares of stock directly from the company, bypassing the fees of a broker. Research indicated that company shareholders tend to be more loyal customers of their products. Thus, companies felt this was a win-win situation for both sides.

Today, DRIPs usually include a Direct Stock Purchase Plan (DSP) option. This latter term is also known as an Optional Cash Purchase Plan (OCP), Stock Purchase Plan (SPP) or the Direct Investment Plan (DIP). More than 1,000 companies offer some sort of DRIP including top businesses such as IBM, McDonald's and Johnson & Johnson. All but three of the stocks that comprise the Dow Jones Industrial Average offer dividend reinvestment plans.

Most company DRIPs require you to already own at least one share of stock before being eligible to enroll in their plan. The share needs to be held in your name, allowing you to receive the actual stock certificate. Most brokerages hold your portfolio shares in their own street names and hang onto the certificates for you. (Some may charge you a fee to make a change.) Once you're the "shareholder of record" you can proceed.

The companies I track for the Chicks Laying Nest Eggs investment club are Oracle and Yahoo!. I found my answer on Oracle's own website in the "investor relations" Frequently Asked Questions section: "No, Oracle does not offer a Dividend Reinvestment Plan or a Direct Stock Purchase Plan." Yahoo! was another story. I discovered that in May 2000, Yahoo! began a program called "Yahoo! SharesDirect." It is one of those companies that does not offer dividends, but nonetheless provides a plan where shareholders can invest, for a nominal fee, directly through the company. I contacted the investor relations department by e-mail and should be receiving an application and specific information about the plan soon.

From what I've learned thus far, I see there are definite pros and cons to entering such a program. Some companies still offer you shares at a discount ranging from 2-5%. Chicks always like a mark-down! The amount of cash you are allowed to contribute varies as well, with minimums ranging between $10-$25. This is terrific for people without huge chunks of money to invest. I think the best part is the fact that some companies charge no fees for purchases and/or sales of stock. No more commissions! Others may charge some sort of nominal amount, but it's still less than what a broker would charge. On the negative side, using a DRIP is not like the lightening fast insta-trading on the internet. Instead, the company dictates when trades are made. Some may make them as often as twice per week or as infrequently as 4 times per year, therefore market timing is pretty much an impossibility. The last thing to consider is time. As we all know "time is money." Maybe that's why we pay a broker. With a broker, all of our stock transactions arrive on one consolidated statement monthly. I can't fathom the paperwork involved having a separate statement and tax form for every stock I own! Then again, I'm often surprised at the lengths I'll go to save a buck!

So it's not the DRIP that's drippy. It's all the research that goes along with it!