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.
Thanks, I've had similar experiences and find that the current aggregation under a few major administrators makes the paperwork a lot easier. Interestingly, I always use the term "dollar-cost averaging" in relation to the additional cash purchases, but now find that many on SA relate the term to the reinvestment of dividends. Strictly speaking, that should not be the case, since the definition refers to investing the same amount each time, whereas the dividends, thanks to compounding, are usually rising each time. I always felt that the automatic monthly debits I had set up were the perfect example of DCA...which I did at $25/month on about a dozen companies.
Best gainers: AFLAC and Johnson Controls.
I wrote a blog (seekingalpha.com/insta...) about my own personal experiences with various DRIP's and transfer agents.
Perhaps things have improved since then.
But many participants in the "real" DRIPs consider the cash-purchase feature, especially a no-fee one, to be the more important part of the plan (than reinvestment). This is true particularly when one is starting out and starting small, when the dividends to be reinvested are negligible. For example, if I could only afford $50 a month to build a position in PEP and a broker requires a $2,000 minimum to open an account, then there's no question which way I'd (be able to) go.
Makes a huge difference when you're working with relatively small purchases. When the dividend payout is less than commission for a trade, you really appreciate the free dividend reinvestment. You can switch at any time from "reinvest in security" to "cash payout".
And to David's point, Fidelity will only reinvest your dividend for free, they don't do the real DRIP.
1. Brokerage DRIP account or DRIP from company direct
2. What vehicle is best, IRA or Roth IRA or just brokerage account
3. How can you structure ownership so parents or child cannot raid the fund before a certain age (like for college)
Thank you, your advise would be much appreciated.
I would never again use a brokerage DRIP.
My wife inherited stock from her parents, which was held at a brokerage (to be left unnamed, so they can't sue me). We tried to pry that stock loose from that brokerage. It took almost 3 months, during which time not only did they fail to transfer stock from the brokerage to our other account, but they also (mistakenly and perhaps illegally) reverse-transferred stock from our other account to the brokerage.
During those 3 months, I kept ripping my hair out, I was so furious. If they hadn't finally done it right, I would have sued them, or pursued action on them via the SEC.
1. As mentioned above, the advantage goes to the company-sponsored plan for purchasing additional shares...rather than paying a commission for every cash purchase at the brokerage.
2. There aren't many options for combining IRAs with "real" DRIPs, so a brokerage version can be better. Keep in mind that in order to contribute to an IRA or Roth IRA, the person has to have earned income.
3. Supposedly, minor children aren't allowed to own stock in their own names, but brokerages may not even check for that. The proper form of ownership is a Custodial Account, which uses the child's name and SSAN, but names the parent as Custodian. The child then takes ownership at age 18/21...but the parent can direct assets toward payment of college expenses. This gets tricky with IRAs, though, which are better kept separate from taxable accounts. Most DRIPs allow registration in custodial form, as well as by individuals, joint accounts for spouses, and even corporations. Also, nowadays, most DRIPs allow registration by foreign investors, although all cash activity is in U.S. Dollars.