Slow DRIP into investing

by Julie Rains on 19 June 2007 1 comment

water dripping from faucet

My first-ever individual stock holding was a Duke Power (now Duke Energy) share that I acquired through its Dividend Reinvestment Plan or DRIP. I don’t recall every detail but at the time, Duke Power was my utility company, sent me a bill every month, and enclosed a notice about its DRIP, which was available to its customers.

Signing up and becoming a shareholder was easy. Presumably, I requested, received, and read a prospectus so that I could understand the risks of owning this particular stock. Then, I filled out a form and sent checks of $25 or $50 every month or so. The company sent me statements, confirming receipt of my checks and showing me the value of my holdings.

Just a side note: at the time of my investment in the mid-80s, Duke Power was a public utility in a regulated industry so profits were nearly guaranteed and dividends were steady. Jumps in the stock value or sudden declines were unlikely in such a controlled environment. Duke Power has since morphed into Duke Energy, “a diversified energy company with gas and electric businesses, both regulated and unregulated, and an affiliated real estate company.” http://www.duke-energy.com/about-us/businesses.asp, June 17, 2007. Today, there is more risk associated with owning the stock because its businesses are no longer all regulated.

With a DRIP, you can accumulate shares by making periodic purchases and authorizing the reinvestment of dividends. For example, Stock A is selling for $25 and the company declares a dividend of $.05 per share. If you have 100 shares of Stock A, you will receive a dividend of $5, which is then reinvested automatically with the purchase of .20 shares. It doesn’t seem like much but, over time, your account grows in value if you reinvest the dividends rather than spend them on something else. (A note about taxes: if the shares are held in a regular taxable account, you will have to pay taxes on the dividends, whether you reinvest the dividends or not.)

The main catch to this program is that you can not control the exact price you pay for the stock. You send in your money (either via regular mail or electronically) and the stock is purchased on your behalf, typically at the market price on a day designated by the company or its agent. For example, if you send money on January 15, the stock may be purchased on January 30 for whatever the market price was on that day. If the stock price was $35 on Jan. 15 and $45 on Jan. 30 then the stock would cost $45. If you sent $50, then you will receive 1.11 shares ($50 payment/$45 per share).

I started my DRIP in the pre-Internet, pre-discount brokerage, and pre-ShareBuilder days when these plans were especially very attractive compared to full-service brokerage accounts. The fees for starting a plan, purchasing shares, reinvesting dividends, receiving statements, selling shares, maintaining an account, and closing an account were zero to nominal. The advent of ShareBuilder (to be covered in another post) and online brokerage services (also, more later) make DRIPs less attractive than 20 or so years ago. Still, these plans offer an easy, simple way to get started in investing.

To find out if a company has a DRIP, do a search using the company name and investor relations; then starting looking for Shareholder Services, Investor FAQs, DRIPs, Direct Stock Purchase plans, etc. I searched for Duke Energy, Lowe’s Companies, and AT&T as well as Amazon, Target, and Starbucks and quickly found whether these companies pay dividends and/or whether they offer DRIPs or similar plans. Following the links, I also found pages that listed fees associated with transactions and some way of actually starting an account. Here is what I found:

Duke Energy

Lowe’s Companies

AT&T

Amazon.com
Amazon.com does not pay dividends or have a Direct Stock Purchase Plan (similar to the DRIP but sans the dividend reinvestment component).

Starbucks
You can only buy Starbucks through a stockbroker or brokerage firm

Target
Target offers a Direct Investment Program and you can purchase stock through a transfer agent

Please know that I am not endorsing or recommending the purchase of any of these stocks just using them as examples. I mentioned them because they are household names in my part of the world and investing in companies you already know about is often a good way to get started in building wealth. As always, read the prospectus before investing. 

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One of the best and easiest ways to start investing.