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 36515|
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. http://www.boards.fool.com/Message.asp?id=1040005004504003]
Q. Where can I get more information on DSPs and DRPs?
A. Internet sites which provide information are:
The Motley Fool http://www.fool.com/DRIPPort/DRIPPortInfoLinks.htm
The Clearinghouse http://www.enrolldirect.com -- lists companies with DSPs.
Netstock Direct http://www.netstockdirect.com -- lists companies with DSPs and DRPs and allows direct online purchase of over 300 DSPs. This site has a search engine, plan criteria and links to companies, too.
The Securities Transfer Association http://www.stai.org publishes a list of DSPs and links to Reuters MoneyNet data on the companies.
Moneypaper http://www.moneypaper.com -- information on DRPs and includes a brokerage to help buy the first share.
The DRIP Investor http://www.DripInvestor.com --information and advice from Charles Carlson.
Stock1 http://www.Stock1.com -- lists S&P 500 and Mid Cap companies with DRIPs.
Q How do I combine DRPS with the Foolish Four?
Q. What kind of companies should I invest in?
A. Leading companies that you understand and that you plan to hold for the long term. Here is what the Fool's Drip Portfolio looks for, roughly, in its investments: http://www.fool.com/DRIPPort/DRIPCriteria.htm
Q. What prices are good to buy at?
A. See our "Price vs. Value" column for larger thoughts on direct investing and valuation: http://www.fool.com/DRIPPort/1999/DRIPPort990311.htm.
Because direct investors dollar-cost-average, they will buy at various prices over time and in the end the prices paid will average out to the lower, more attractive side, if they invest regularly.
Q. What about direct investment plans and IRAs?
Q. How do I open direct investment plans as gifts for friends or for children?
Q. Can you tell me about the Education IRA and these investment plans for children?
Q. How do I sell shares from a plan?
A. There are a couple of options. The first is to have the plan transfer any "whole" shares in certificate form to you and then liquidate any "fractional" shares. Then you can send the stock certificate to a brokerage company to sell. The second option is to have the plan sell the shares and forward the proceeds to you. If the plan sells the shares, there will usually be a $10-15 fee plus a commission cost/share and you have little control over the price the shares are sold (they will be sold at market prices usually within a few days or week of your request). You can sell partial shares or sometimes (though not always suggested) borrow against your account value if you need money. Selling for any short term need alone should be avoided if possible. You want to let your money compound for decades, and keep adding money on temporary market or stock weakness.
Q. When should I sell an investment that seems to have gone bad? And how do I know it has gone bad?
Q. What about Taxes?
A. The Tax Man Cometh column: http://www.fool.com/DRIPPort/1999/DRIPPort990305.htm
Q. Where do direct investment plans come from?
The Drip Portfolio
Q. What is the Motley Fool's Drip Portfolio?
A. It is a real money portfolio founded in the summer of 1997 that invests via direct investment plans. It offers a regular column for educational reasons and it announces all buys before making them and only after long public study.
For information including the number of stocks the port will own, what it began with, readers "following along", and what it aims to do, see this page:
After that, for other complete Drip Port information, see this page: http://www.fool.com/DRIPPort/DRIPPortInfoLinks.htm
Q. What does Drip Port own?
A. As of mid-1999, it owns Intel (INTC), Johnson & Johnson (JNJ), Mellon Bank (MEL), and Campbell Soup (CPB). Campbell Soup is frozen due to fees.
Q. How do Drip Port and other Fools account for their regular investments?
A. We use a share price or "value per share" accounting method much like a mutual fund does in order to keep our returns accurate while adding cash regularly. For details: http://www.fool.com/DRIPPort/AccountingDRIPs.htm<