The Motley Fool Discussion Boards
Investing/Strategies / Drip Investing - Companies
|Subject: Re: FAQ Assistance||Date: 6/11/1999 4:49 PM|
|Author: TMFJeff||Number: 11437 of 36555|
The following is the Motley Fool's Direct Investing and Drip Portfolio Frequently Asked Questions list. (We'll tackle direct investing first, then the Drip Portfolio.) If you have content to add, questions to ask, or improvements to suggest, please post them on this board. We will incorporate them and credit you. This will be a work in progress.
Without further ado:
Q. What are dividend reinvestment plans (DRPs, or DRiPs) and direct stock plans (DSPs)?
Direct Investment Plans Defined
There are two types of direct investment plans:
Dividend Reinvestment Plans (DRPs)
Direct Stock Plans (DSPs)
The benefits offered by every direct investment plan that we're interested in include the ability to:
- Invest small amounts of money on a regular basis
- buy more shares when prices are lower, and less when they're higher (as a result, you don't fret over the stock market's volatility)
- Reinvest dividends directly into more stock
- Avoid commissions and other costs
- Vary your investment amounts monthly, or don't invest at all when you wish
- Diversify your stock portfolio even with very little money
- Sell shares readily
...and much more.
Dividend reinvestment plans are more prevalent than direct stock plans (which are also called direct initial purchase plans, or DIPs). Nearly 1,100 companies offer dividend reinvestment plans, while over 450 companies (and growing) provide direct stock plans. Partially due to the Internet, direct stock plans will likely outnumber dividend reinvestment plans in a handful of years.
Both plans allow an investor to purchase shares of stock directly from a company in amounts that can range from $10 per month to $50,000 per month without cost, and almost all plans allow dividend payments to be reinvested in more stock. The only cost with a majority of these plans is a one-time startup fee that averages between $12 to $15, and a similar fee to sell stock. Usually, all of these plans are administered through a transfer agent. A transfer agent is a financial firm, such as a bank, that handles the plan's transactions and record keeping. You only need to be aware of transfer agents because they are the entities that you usually transact with when using direct investment plans, even though it'll often seem as if you're dealing directly with the companies in which you're investing.
Usually it is the large, long-established, dividend-paying company that offers either type of direct investment plan.
So, what're the differences between the two plans? They're slight and are mainly encountered at the outset.
To enroll in a company's dividend reinvestment plan, or DRP, you usually must be a registered owner of at least one share of the company's stock. In contrast, to enroll in a direct stock purchase plan, or DSP, you can begin to purchase shares directly from the company immediately. It's that simple: you typically must own at least one share of a company's stock to enroll in its DRP, but you needn't be a shareholder to begin most DSPs. Once you begin, both plans are very similar in function and in purpose.
Each type of plan has slight advantages and disadvantages. The largest difference involves the money needed to start. Dividend reinvestment plans usually require you to own one share to enroll, meaning you typically must spend $60 to $100 to begin. By contrast, direct stock plans allow you to immediately enroll. However, you usually must start these plans with a minimum investment that can range from $250 to $500. So, DRPs typically require a smaller investment to start.
While it's important to understand the differences, it isn't necessary to contemplate them any more than we already have. A company will either offer a dividend reinvestment plan or a direct stock plan, but you'll decide where to invest based on a company's merits, not on the plan that it offers. The plans are equally beneficial, no matter what startup quirks they may have. What's more important is that you start to invest sooner rather than later.
Q. What is important to consider before beginning to invest in these plans?
A. First, your standing credit card debt should be zero. From there, very succinctly helpful thoughts are here: http://boards.fool.com/Message.asp?id=1030009002088000
Q. When should I begin and how can small amounts of money compound to become meaningful?
Q. How do I begin a direct investment plan?
[Editorial note: If you purchase your stock through a broker, you don't need to wait until you actually have the certificate in hand. Another possible way to acquire the first share is to have it transferred from a friend or family member or if the company has a DSP to buy the share from the company.