Better Alternatives To Dividend Reinvestment Plans (DRIPs)

Dividend Reinvestment Plans, or DRIPs, are programs that allow individuals to buy stock directly from the company, with dividends from the stock being automatically reinvested into more shares. Here are some popular companies that have DRIPs and also see the Wikipedia entry on DRIPS here.

DRIPs often charge no commissions, so if you set up a DRIP for General Electric (GE) and committed $50 per month, every penny of that would go towards buying $50 of GE, even if it meant buying a partial share. Dividends also get reinvested for free. The main startup costs involve buying one share through a broker and then transferring ownership to your name. This all made them a good alternative to using a broker and paying for every trade.

Do it yourself? Start with less than $100? No commissions? Sounds like something I’d go for. In fact, I don’t participate in any DRIPs. The main reason is that I’m really not interested in buying any individual company stock right now. DRIPS are meant as a very long term commitment, and I just don’t trust any one company to perform well for the next 30 years. On top of that, the accounting required to keep track of the cost-basis for all your shares sounds like a nightmare. Besides, I think there are better alternatives out there:

With just $50 a month, these days you can go through a company like T. Rowe Price or TIAA-CREF and invest in a low cost mutual fund that is diversified across hundreds of companies. It’s so easy a caveman could do it. ;)

If you have at least a few thousand dollars, there are now brokers that offer free trades like Zecco and Wells Fargo. I bet there will be even more to come in the future.

Comments

  1. DRIP is now less attractive since there are many brokers offer free dividend reinvestment. But there aren’t many brokers offer commission free trading except Zecco (I hope Zecco can be around for a while to prove their business model is actually working). In this sense, DRIP still has some values if one want to invest in dividend-paying companies such as GE, JNJ, and PG.

    On the other hand, can you trust just any mutual fund company or the funds they offer for next 30 years? I don’t.

  2. Arun Prasad says:

    Hi…

    This is not about the DRIP but was curious if you had any comments on that stock doubling project. The keeps mentioning over and over ( almost like he cuts and pastes ) that he researches 100′s of stocks but never gives any details of his research. Is he legit and since your letting him sponser you – do you support it?

    thanks,

    Arun

  3. Sponsored links are just that – They pay me, they get an advertisement. I do not endorse or provide any opinion, either positive or negative, on them. Just like the Google ads, I do not censor anything except to remove any adult or illegal sites. I leave it to each reader to make their own decisions if the ad interests them.

    I have not investigated the stock doubling site. If you are looking for my opinion on anything, it’s all in this side of the page :)

  4. With my switch to Wells Fargo, one of my first things I noticed was the lack of ability to enroll holdings into a DRIP. Now that wouldn’t have been a deal breaker anyways as with enough free trades, I can always buy more shares myself with the dividend money. However, after the first dividend distributed, I noticed it auto-bought fractional shares. I emailed Wells Fargo support and was told all holdings are automatically enrolled in DRIPs except for closed-end funds.

  5. Along the same argument – http://www.sogoinvest.com is $1 trades for 90 days and then they increase it to $3 bucks or less depending on your plan! Check it out

  6. Speaking of sogoinvest.com, they just sent me a letter yesterday saying they have added free dividend reinvestment. So your comment is more on-topic than ever.

  7. Another benefit of ETFs over mutual funds is that ETFs also are generally treated like single stock when it comes to establishing a DRIP.

    Thus Jonathan’s (quite reasonable) aversion to single-company investments and preference for diversified category-based investments does not preclude DRIP benefits. I own numerous broad-category ETFs that I have automatically reinvesting distributions for free.

  8. “… the accounting required to keep track of the cost-basis for all your shares sounds like a nightmare.”

    How are mutual funds any different? DRIPs probably provide the cost basis in their 1099 just like your mutual funds.

    With 6 or so well chosen individual stocks, you actually have a chance of beating the market, with mutual funds or ETFs, you are basically holding the market. You still need to hang in there long term to increase your probability of success, but that goes for anything in stocks.

    Good job on promoting long term investing Jon versus the momentum investing the media and the brokerage industry tries to get you to do.

  9. I ve written before to you on DRIPS. My personal goal with DRIPS is to build up up a large amount of shares in different companies in different industries WITHOUT hurting my pocket. I own about 7 different companies in this fashion, and spend about $4 a month in fees. You must purchase through the companies transfer agent such as Wells Fargo, bank of ny and mellon investors.

    Mellon will waive the initital investment (sometimes $250 or $500) if you comitt to a certain time in each plan. Wells has a bunch of plans that are free from commission. Ge which is with BONY, charges $1.00 a month for the electronic purchaes but no fee for dividend reinvestment!

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