DRiPs for the small time investor
When I first looked into investing, I was blown away by the fees and commissions involved with trading. I had about $1000 to invest, but from most brokers I found I noticed that 1% of that would immediately go towards the fee for buying stocks. And that figure is assuming I spend the entire $1000 on one stock. If I want to diversify, which I should, and buy $200 worth of 5 different stocks, the fees can jump up to 7-8% just for buying the stock. OUCH!
What attracted me was no load stocks, where you buy stocks directly through the company and avoid costly brokerage fees.
There are many plans associated with buying directly from the company, but today I'm going to talk about Dividen Reinvestment Plans (DRiPs). The advantage of this plan is that dividend payouts are automatically reinvested into more stock for that company. Let me give you an example of why, over time, I think reinvesting dividends is a very good thing.
A $40 purchase in Coca-Cola (NYSE: KO) in 1919 would get you about $250,000 now if you took the dividend checks.
A $40 purchase of Coke stock in 1919, but also reinvesting the dividends into Coke Stock, would yield you an average of 16% per year, or over $5 million dollars. This is because Coke has paid over $21,000 in dividends over the years, which reinvested makes the difference. (source)
What's more? With little to no fees there isn't much holding us back from diversifying. I could take my $1000 and invest $125 in 8 different companies.
There are some drawbacks though. DRiPs are not for the day trader. Although buying the stocks are cheap, usually just a small couple dollar transaction fee, selling the stock usually does have a higher fee. So if you buy, make sure you're in it for the long haul. Reinvesting dividends usually doesn't have a fee.
Another drawback is that there are no standards, each company makes it's own rules, so you'll need to look at each company individually as far as their fee structure, rules, etc.
Overall though, it's a great way for a small investor to build a diversified portfolio and invest over time, without paying costly brokerage fees for stocks or paying outrageous fees for mutual funds.
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