by Archie M. Richards, Jr., CFP^®
January 26, 2004

Want to buy individual stocks without a broker? Use dividend reinvestment plans, otherwise known as "DRIPs." About 1000 companies and closed-end funds offer these plans. They enable investors to purchase stock directly from the company without a broker.

First, the bad aspects:

• On the buy side, the fees range from $1 to $5 per purchase. In most cases, the fees are reduced with automatic investing, meaning that money is transferred to the plan on a regular basis from a bank account.

• DRIP selling fees are generally higher than the buying fees. A common selling fee is $15 plus 12 cents per share. Most DRIP investors think long term, however, and don1t care about selling fees.

• To start a dividend investment program, many DRIP plans require that you own at least one share of the stock. Buy the required number from a broker. Ask her to send you the stock certificate in your name. (This may cost something like $25.) Forward the certificate to the DRIP plan for safekeeping thereafter without cost.

• DRIPs don't offer the same speed of execution as brokerage firms.

• A few plans offer DRIP IRAs. These would be highly undiversified, however, since the IRA would hold the shares of a single company.

Now for the favorable aspects of DRIPs:

• Dividends are automatically reinvested in additional shares of the company's stock. Since the dividends seldom come out to whole shares, companies issue fractional shares.

• Your needs may change. You may begin by reinvesting dividends, but later need the money to support yourself. Companies with DRIP plans are therefore willing to pay out part or all of the dividends in cash.

• Apart from the reinvestment of dividends, many plans offer the opportunity to purchase additional shares. These are called "optional cash investments." In most cases, the purchases are permitted at a specific time of the month. Mail your checks in plenty of time to avoid missing the deadline. Some DRIPs offer wide latitude for optional cash investments. For example, to buy ExxonMobil stock (apart from dividend reinvestment), you may invest as little as $50 and as much as $200,000 a year.

• Some plans offer "direct purchase plans," enabling you to buy even the initial shares directly from the company. In this case, you need no broker at all.

• Some DRIPs provide discounts of 2-to-5 percent from the current market price. Usually, the discounts are based on the average of prices over several previous days. The discounts are usually less than companies would pay to an investment banker for capital raised in an IPO or a secondary offering. The amount of a discount may change, depending on the company's need for capital.

• On all DRIP purchases, the companies receive the money themselves. In effect, DRIPs are continual secondary offerings.

• All thirty of the Dow Industrial stocks offer dividend investment plans. All but one permit optional cash investments. 16 of the 30 even allow direct initial purchases.

Remember, the dividends on most stocks are federally taxed at a 15 percent maximum rate. To enjoy this lower rate, you're required to hold the stock for at least 61 days within a 120-day period that straddles the ex-dividend date. The ex-dividend date is the first day that holders of a stock do not receive the next dividend. Got that? It's another governmental stab at simplifying taxes.

Each year, adjust your cost basis in the stocks you own. Even though the dividends are reinvested in additional shares of the stock, you pay tax on the dividends anyway. To avoid paying tax twice, add the annual dividend amounts to your cost basis of the stock. This reduces the capital gains when the stock is sold.

For each DRIP plan, a prospectus explains the terms. Some prospectuses may be read on the Web.

A monthly newsletter, "DRIP Investor," supplies phone numbers for each DRIP plan, plus considerable other information. The subscription price is $99 per year. See www.dripinvestor.com or call 800-233-5922.

For the purchase of individual stocks, consider dividend reinvestment plans. Enjoy the long-term benefits of compounding with minimum costs.