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DRIP Investing: Dividend Reinvestment Plans

By Edited Nov 13, 2013 7 10

Wouldn't you like to buy blue-chip stocks like GE or Kraft for $1 or less a month in transaction fees? My Wealth Plan: Build up a solid dividend stock portfolio

I now really love Dividend Reinvestment Plans, or DRIPS, as an alternate way to invest my hard-earned money. They offer low monthly or quarterly transaction costs (and sometimes company paid!), and provide a great way to accumulate shares in great companies over a long period of time. The best thing about DRIP plans or DSPP - direct stock purchase plans, is that after fees -- every dollar you give them is invested - resulting in whole and fractional shares. Since even fractional shares generate dividend income, your money grows faster. You don’t need a financial planner to tell you how smart that kind of compounding is! This is a big part of my long-term wealth building plan.

MY DRIP INVESTING EXPERIENCE

So I’ve always been fascinated with the stock market. I currently have a couple accounts at an online

DRIP Investing-Stocks-GE-Kraft-Wells-Fargo
discount broker (one is a ROTH IRA), and through a couple mutual fund companies for retirement plans at work. I’ve had some success --and some failures-- trading and investing in my taxable account, but I try to be very careful with my long-term retirement accounts (Roth and 401k/403b). But I found that I was spending too much in transaction fees (even at my very low-priced online broker), and that I was exiting some stock positions too soon. I would watch companies that I held for “swing trades” do really well months after I had moved on to something else. DRIP plans are set up to be slow, long-term holding accounts. They really don’t want you to sell - which is good discipline if you’ve chosen solid companies.

DIVERSIFICATION

I had heard about DRIP plans a few years ago, but had never serious considered them. The warnings were about too much paperwork, no control over monthly purchase prices, and tax hassles when you sell, etc. But I think the concerns are exaggerated. It’s also very simple if you don’t plan to sell for a long time - just keep all your paperwork.

I feel that by investing directly in company stock (through their transfer agents), that after small reasonable fees, I put every one of my limited investment dollars to work. So I started at $50/month last summer in Kellogg Company (K) and Kraft Foods (KFT). What I wanted was stable dividend paying companies that would offset my tech-heavy growth investing elsewhere. (No, Apple and Google don’t have DRIP or DSPP plans...) After a few months I increased my monthly bank debits from the $50 minimum in most plans, to $55 monthly, to currently $75 per month. Why? It’s really great to watch these accounts grow in value, and in he future when I can I will increase my monthly amount. On the other hand if at any time we cannot afford it, we can simply turn off the monthly contributions and just let the quarterly dividends compound.

MY DRIP PORTFOLIO

Now we invest monthly in General Electric (GE), Kraft Foods (KFT), Kellogg (K), Wells Fargo (WFC), Banco Santander (STD), Supervalu, Inc (SVU), and Caterpillar (CAT). At set times throughout the month each plan drafts $75 from our checking into these accounts for new purchases. Quarterly each company pays us a dividend, which is reinvested. The fees vary for these seven plans from free to $1 - $2.50 per month (for the foreign bank). Overall it’s very cost effective.

Kraft Foods

For now seven is plenty. I want to have a concentrated portfolio of solid companies with enough shares in each to generate nice dividends. Will I add more? Maybe. At some point I could conceivably add one or two more - maybe Proctor & Gamble (PG), Johnson & Johnson (JNJ), or Qualcomm (QCOM). I would add MasterCard (MA) now if they had a DRIP or DSPP plan. Sadly, they don’t. Just remember that you can simply buy stock of those other companies you like in a Roth IRA. I have recently added long-term positions in Ford Motor Co (F) and Arcelor-Mittal (MT) in my Roth. (They will reinvest dividends there as well, but when I buy shares I can only buy whole shares with my funds.) Warren Buffet has a saying about choosing 20 stocks/companies to hold forever, and just adding to those positions over time. (I might not get 20!)

DRIP PLAN BENEFITS

*After a one-time set-up fee for each account (from free to $7.50 or $15 max), each monthly purchase is very cheap. Every month we put $75 in GE and they charge a dollar (for the ACH bank draft). The other $74 buys as much GE as it will -- out to three or four decimal places. Kraft, for example, costs .80 cents each month, but they take a small percentage of the dividend. Very cheap.

*I think the paperwork is very manageable. I leave everything online using e-statements which I will print out once a year. The dividends are taxable, even if reinvested, but still at a lower rate than income from my day job. They just send you a simple tax form.

*By paying some attention as I added more DRIPs, the dividend payments actually come every month throughout the year. It doesn’t matter now, but decades from now when I want these dividends as income, my DRIP plans pay each month. For example -- Kraft and General Electric pay dividends in January, April, July, and October each year. Santander and Caterpillar pay dividends every February, May, August, and November. And March, June, September, and December bring dividend payments from Wells Fargo, Supervalu Inc, and Kellogg Company. It won’t be the same amount each month, but it will be spread out. This is my wealth planning!

*Regular investing over time is great for dollar-cost-averaging. As the market goes up and down I often get a better price than my initial investment. If I invested all at once, which I couldn’t anyway, I would need the price to go up to start making money. Some months my DRIP contributions buy more shares because the stock prices have pulled back, or the market is volatile. You cannot specifiy when the purchase is made or at what price, but each plan buys shares about the same time each month so it averages out. 

WHY THESE SPECIFIC PLANS

You might ask why I chose these specific companies. In my DRIP plans we have two food companies (Kraft and Kellogg), a grocery store (Supervalu), a US and international bank (Wells Fargo and Banco Santander), a global conglomerate (General Electric), and the big industrial earth mover (Caterpillar). These companies have exposure to the post-recession rebound in the US, and to developed and emerging markets around the world. I feel diversified in these DRIP plan choices (considering my investments elesewhere), and I’m actually really happy now when the market prices go down in some months because our contributions buy more shares. 

I encourage you to research DRIP and DSPP plans, even as part of a larger strategy of wealth building. Please consult your own advisors, financial planners, accountants and other before committing any risk capital to investment.


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Comments

Oct 20, 2011 8:31am
Deborah-Diane
We bought Disney stock for all our grandkids, and the size of their positions continues to grow through a DRIP. They are a great idea!
Oct 20, 2011 12:41pm
CapstoneTrends
Yeah I've become a big fan of DRIPS, and it is a great way to get kids involved - especially with companies/products they know.
Oct 20, 2011 3:16pm
marcel
Good call! DRIPs are the best if you want compounding growth.
Nov 9, 2011 4:30pm
KrisSigeti
I like it! I am going to start looking into that. I like that I don't need a couple grand off the bat to begin.
Nov 10, 2011 10:29am
kmancloquet
Wow cool. I never knew you could do this.
Nov 10, 2011 7:01pm
sciencestudent
Drips have long fascinated me. Great article.

Have you considered ATT or Verizon? Those two seem to be pretty strong performers on a dividend basis.
Nov 11, 2011 11:28pm
daveedpm
Nice article! DRIPs can really be a great way to invest. You get the power of reinvested dividends working for you in one of the lowest fee investment vehicles possible. People are also less likely to jump ship with a company's DRIP program just because there is a temporary dip in the stock price. Thanks for bringing it back to mind.
Nov 16, 2011 7:07am
CapstoneTrends
thanks for the comments all!
Apr 26, 2013 7:47pm
affordancedesigns
I think this is one of the most overlooked ways to ensuring your nest egg multiplies!!!
Feb 25, 2014 2:01pm
laydov
Nice article. Very informative and helpful.
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