Sunday, March 28, 2010

For Those That Are Interested in Dividend Reinvestment Plans (DRIPs).

I have been investing via Dividend Reinvestment Plans since 1999 when I started with Exxon. I have grown to favor DRIPs over most other investments. I like DRIPs because after paying an initial fee, you can make reoccurring investments for free or at much lower costs than most discount brokers. Minimum reoccurring investments typically range between $25 and $100 per month. Additionally, you frequently have the option of having dividends reinvested for free. Some companies charge a fee for dividend reinvestment; however, you can just as easily avoid the fee by having these dividends direct deposited to your bank account.

The first thing to understand about DRIPs is that your shares will be held by a "transfer agent." My two favorite transfer agents are Computershare and BNYMellon. If you're interested in starting a DRIP, I recommend you go directly to their sites and see if any of the stocks on your watch list can be purchased directly through them for initial setup.

A few examples of stocks that can be purchased directly through these transfer agents are:

Purchased directly through Computershare:

* Exxon Mobil (XOM)
* Lowe's Company (LOW)
* Pfizer (PFE)
* Wal-Mart (WMT)

Purchased directly through BNY Mellon:

* Conoco Phillips (COP)
* Health Care REIT (HCN)
* Limited Brands (LTD)
* Pepsico (PEP)
* The Bank of New York Mellon (BK)
* The McGraw-Hill Companies (MHP)

Another popular transfer agent is Wells Fargo.

Many transfer agents require you to have an initial share before enrolling. When this is the case, I prefer to use Directinvesting's site to establish my first share. Direct Investing will coordinate the initial stock purchase and administrative setup with the stock's transfer agent.

Starting DRIPs can be a little time consuming because it will take you some time to find those DRIPs that are low fee or no fee. Additionally, it will take you some time to find the cheapest means of starting a DRIP. Basically, expect to spend $10-$30 to start a DRIP.

My favorite DRIPs that I hold are (Stock - Transfer Agent):

Johnson & Johnson (JNJ) - Computershare
Wal-Mart (WMT) - Computershare
Exxon Mobil (XOM) - Computershare
Lowes (LOW) - Computershare
3M (MMM) - Wells Fargo
RPM (RPM) - Wells Fargo
Aflac (AFL) - Aflac
Southern Company (SO) - Southern Company
Dow Chemical (Dow) - BNY Mellon
McGraw Hill (MHP) - BNY Mellon

Each of the above DRIPs have no or low cost methods of reoccurring investment.

I went a little overboard and bought a lot of DRIPs. The following are DRIPs that also offer no or low cost reoccurring investment. I continue to hold these and will only buy more if their earnings improve (Stock - Transfer Agent).

Alcoa (AA) - Computershare
Illinois Tool Works (ITW) - Computershare
Manitowoc (MTW) - Computershare

Baker Hughes (BHI) - BNY Mellon
Harris Corp (HRS) - BNY Mellon
Limited (LTD) - BNY Mellon
Manpower (MAN) - BNY Mellon
Sherwin Williams (SHW) - BNY Mellon

Cummins (CMI) - Wells Fargo
Pentair (PNR) - Wells Fargo
Graco (GGG) - Wells Fargo

Overall, I hold about $15,962 in DRIPs that have a net dividend yield of 2.7%. This gives me a current annual dividend of $431.56. I intend to continue to grow this portfolio until it reaches a level that will offer significant dividend income in retirement (at least $4000/yr). Right now, I'm investing about $300 per month and will ratchet this reoccurring investment up periodically as our household income increases and as we pay off our investment properties.


DRIP Advice said...

DRIPs provide a great means to build a long term investment in a large company. I think they are especially great to start getting kids investing.

Finance Junkie said...

Thanks for the comment. You're spot on with your thoughts about getting kids to invest.

Khmer Insurance said...

I like the idea of doing investment too but it doesn't work here for me. Thanks for sharing your lessoned learned.

Anonymous said...

I do not recommend using a Dividend Reinvestment Plans from a company.

Dividend reinvestment is tax nightmare. When you sell your stock you have to use the price of the stock at the time of stock purchase in order to calculate the profit for your taxes. This means if you have owned stock for 10 years and reinvested 4 times per year (quarter dividend payments) you have to call the difference from purchasing and sale price over 40 times.

Keep away from DRIPs only if you intend to use dividend reinvestment in an IRA account. Only then do you not have to worry about these tax problems.

Anonymous said...

I disagree about DRIP's being an accounting nightmare. I invest through BNY Mellon (since 2005) and I have online access to every one of my purchases, every dividend payment made and every dividend reinvestment made back into my account down to the 1/1000th of a share. Every single transaction is available and if I would ever sell, I would just have to calculate a basis based on the information. It would take some time, but the information is available online.

joe said...
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