Stock Dividend Reinvestment Plans: More Trouble than They Are Worth
Stock dividend reinvestment plans create a string of hassles. On the surface they sound great. But once the entire picture comes into focus this is not the case.
Companies offer stock dividend reinvestment plans (or DRIPs) because they encourage long-term investment behavior. This provides support for their stock price. It may also be an avenue for selling equity and a public relations tool. Many times companies provide these programs at low or no cost to the investor.
They offer someone with limited cash a way to get started. Many only require ownership of one share of stock to begin reinvesting dividends. Often the investor can also send additional cash at their discretion. $10 here and $20 there adds up over time.
But they are a hassle to set up. When I had DRIP accounts you could buy the one share of stock through a brokerage account and then have a stock certificate issued. This would take the share off the brokerage books and put it onto books at the transfer agent. Then you could enroll in the applicable DRIP. That strategy may still work. But times are changing. Disney recently ended the practice of issuing stock certificates. Facebook never started in the first place. Fifteen years ago getting a certificate issued was a free service. Today E-TRADE charges $500 for each one.
Back around 2000 I transferred some shares from a DRIP account to Morgan Stanley using the Depository Trust Corporation (DTC). This did not involve getting a certificate issued. But it required a lot of phone calls and paperwork to get the job done. It is logical to assume you could go from brokerage to a DRIP account as well. But this would take more phone calls and research to verify if it is possible at all.
Some companies offer a Direct Stock Purchase Plan (DSPP). Caterpillar is one. In this case you are not required to be an existing shareowner to start an account. Brokerage transfer becomes a non-issue. However not every company you might be interested in will have a DSPP and fees could be an issue. You will want to review the plan fee schedule thoroughly before committing.
Once you go to the trouble of setting up a dividend reinvestment plan the terms may change. I had a basket of several right after college. Among them were Coca-Cola and Pfizer. All my literature on both is long gone. But the DRIPs I picked out were either entirely, or close to being, completely fee-free. A look at either plan shows that today they are layered with charges.
Your money also does not necessarily get invested when you decide. 3M illustrates this. They invest optional cash purchases within five business days of receipt through a broker on the open market. Your purchase price will be a weighted average of all shares purchased on that investment date. Dividends are reinvested as soon as administratively possible, and no later than 30 trading days, following the dividend payable date. If you have enrolled in a DRIP you likely have a long-term view. But there is still loss of control. In volatile markets even one trading day can make a big difference.
There can be additional hassle when it comes time to sell. If you opened the account by having a stock certificate issued the certificate has to be deposited into your account. If this is not done the certificated shares cannot be sold, only those held electronically in your DRIP account. If you have not deposited the certificate before selling there will be a delay of several days while it is mailed in.
Cost basis might also be an issue. All the small purchases from dividend reinvestment must be tracked. Brokerage firms are now required to report cost basis to the government. It is logical to assume the law applies to DRIP accounts as well, which would mean their computer systems likely now provide total cost basis for investors. But DRIP account owners still need to pay attention. If this is not the case the account owner is responsible. Either you or your accountant would have to spend a lot of time totaling cost basis numbers in a spreadsheet.
The biggest problem with DRIPs is that they encourage lack of thought. It is far more convenient in the course of daily life to let investment decisions run automatically. But this discourages learning and in the long run and will prevent you from becoming a more sophisticated investor.
It is better to set aside some money in a savings account until you have enough to justify a stock purchase. Then you can open a brokerage account. Most U.S. banks of any size offer both services. When you are ready you can move money from savings to brokerage right over their web site. You may make mistakes by buying and selling independently. But by sticking with it over time you will learn how to manage investments.
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