DRIPS Are for Kids (and All Kinds of Grown-Ups Too) - Seeking Alpha

DRIPS Are for Kids (and All Kinds of Grown-Ups Too) - Seeking Alpha

Starting Small

Company-sponsored Direct Investment Plans, or DRIPs (originally Dividend Reinvestment Plans) offer people the opportunity to invest small amounts over time, taking advantage of compounding. They also make it affordable for even the smallest investors (literally and figuratively) to create a diversified portfolio without even having a brokerage account. Opening a DRIP for a child (as a custodial account) is a great way to teach that child about money, investing, and the value of time, and it also creates the opportunity to do what many of us only wish we had done...to start early and build a great college fund or even a retirement nest-egg. And, of course, DRIPs are offered by some of the greatest dividend-paying companies on Earth.

Many people confuse these plans with the option to reinvest dividends that many brokers tout in order to keep investors' assets in-house, but there are important differences. Brokerage “DRIPs” may come with fees and often are restricted to buying only whole shares, not fractional shares, as “real” DRIPs do. More important, company-sponsored plans allow the participants to invest small amounts of cash in additional shares and fractions, often without fees or commissions. By contrast, the brokerage versions have no cash-purchase feature, so if the investor wants to buy more shares, then he or she will be subject to the usual commissions and will have to buy whole shares.

Although some DRIPs have adopted fees, there are still hundreds of corporations that still offer no-fee plans. As you can see from this listing, that includes great companies like 3M (MMM), Abbott Labs (ABT), AFLAC (AFL), Baxter International (BAX), CenturyLink (CTL), Church & Dwight (CHD), ConocoPhillips (COP), Dr Pepper Snapple Group (DPS), Emerson Electric (EMR), Genuine Parts (GPC), PepsiCo (PEP) and many, many more. And quite a few of these firms are Dividend Champions, Contenders, and Challengers that have increased their dividends for many years without missing a beat.

The Gift that Keeps on Giving

When it comes to saving for college, many parents think of 529 plans, but these vary greatly in quality from state to state and, like many institutional products, are difficult to judge in terms of cost, let alone understanding what they invest in. But if you fund an account that invests in stocks like General Mills (GIS), Hasbro (HAS), or Norfolk Southern (NSC), you know exactly what you're getting (and what you can expect). Best of all, every penny of every dividend and every cash investment can go toward buying shares (and fractions) that can compound over time.

The benefits of dollar-cost averaging and diversification don't have to be limited to building a college fund, either. Occasions such as birthdays, weddings, graduations, bar/bat mitzvahs, and more are the perfect time to give something more meaningful than a blender or a gift card. In fact, if you visit this site, you'll find it convenient to give the gift of stock that includes enrollment in a wide variety of companies. If you (or they) doubt that your gift can put them on the road to financial wealth, try an investment calculator, like the one at the General Mills site, here.

Best of all, opening one or more DRIPs is perhaps the best way available to get started in investing, without taking on a lot of risk. And unlike the situation a few decades ago, most DRIPs are handled by a handful of administrators, so it's not necessary to end up with “lots of accounts scattered all over the place.” I have about 70 DRIPs and all but a few are summarized at BNY Mellon (BK), Computershare, and Wells Fargo (WFC). Company-sponsored plans are also far more robust, allowing participants to sign up for automatic monthly bank debits, often for as little as $25, to be invested without effort, and even if one doesn't want to commit to automatic investments, many plans allow online investing that just takes a few clicks of the mouse.

So you might want to ask yourself...'Do I want to keep buying my son/daughter yet another toy or more junk food, or do I want to start them on the path to a more wealthy future'?

Disclosure: I am long ABT, AFL, CTL, DPS, EMR, GPC, MMM.