Build Your Portfolio With DRIPs

If you're like a lot of people, you may think you need a stockbroker to buy stocks. Or, you may believe you need a lot of money to start investing. In fact, there's a way to buy stock without a broker, and with just a little money. If this sounds too good to be true, then please read on.

The Basics

DRIPs are Dividend Reinvestment Plans, programs run by companies for their shareholders. They reinvest each shareholder's dividends into additional stock purchases. They also allow the shareholder to make additional purchases of stock on a regular basis. Together, these allow the investor to build up a sizeable holding in the company over time, often without ever paying a commission.

To first get started in a DRIP, you need to be a shareholder in the company, although usually you need to first own just one share. But buying that first share can be a big obstacle to DRIP investing - unless you know a way to do it - such as contacting a firm called The Moneypaper, which you can find listed in our "Links" section. And of course, if you know someone who owns stock in a company in whose DRIP plan you'd like to participate, ask them to simply transfer a single share to your name.

Direct Purchase Plans

One of the best things that's happened in DRIP investing has been the explosion in the number of companies that offer direct purchase plans. These allow you to make your initial stock purchase directly from the company, eliminating the problem of buying your first share elsewhere. The kicker with these plans is that they usually require a minimum initial investment that may be too high for some people. While the initial minimum for a few is as low as $50, most are at least $250, with some (like Disney) as high as $1,000.

Getting Signed Up

Once you have your first share, you need to enroll in the company's DRIP plan. You do this by contacting their transfer agent, who will send you an application. Return that application, and you're an official DRIP investor!

Watch Those Nickels and Dimes!

About three-fourths of all DRIPs charge fees, so pay close attention to them because they vary widely and can have a big impact on your investment. Most fees are flat fees so you'll pay the same regardless of the size of your investment. A $5 fee on a $25 investment hurts a lot more than on a larger one, so you may want to consolidate some purchases if you're investing small amounts (for example, by purchasing additional shares quarterly, rather than monthly).

NOTE: Some DRIP plans let you buy stock at a discount to the market price when you make optional cash purchases. These discounts range from one to ten percent. So if your DRIP plan offered a five percent discount, a $100 investment would buy you about $105 worth of stock. Where else can you buy stock on sale?

The Downside: Taxes Can Be Messy

Even when you have your dividends automatically invested to buy additional shares, they're still considered income for tax reasons. You'll receive a 1099 Form from the company each year that will tell you exactly how much you received in dividends.

As long as you own DRIP stock, you'll have to go to some effort to keep good records. The cost basis - the purchase price after commissions or other expenses - determines the amount of capital gain you realize when you sell your shares.

If you reinvest your dividends, or buy more shares through optional cash purchases each month or each quarter for many years, you'll have dozens of different purchases, all with a different cost basis. And while this might seem like a nightmare, fortunately, personal finance programs like Quicken or Microsoft Money make this job much easier.

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