Here’s a reader question that arrived this week:
I know you write a lot about investing, but can you write a little more about ComputerShare as a way to save money vs buying stock with online brokerages. I just read in WSJ how its cheaper if you are a buy and hold kind and its just as good as someone holding your paper stock certificates.
I am assuming that the WSJ article in question is the one about Ronald Read, the maintenance worker and janitor who saved up $8 million using DRIP plans.
A thrifty lifestyle, solid investing acumen, plenty of patience and the benefits of compounding were at the center of the story of Ronald Read—the quiet and simple-living Vermonter who enjoyed playing the stock market and left behind a nearly $8 million estate when he died last year at the age of 92.
Dividend Re-Investment Plans (DRIPs) traditionally refer to companies that let individuals to buy their shares directly from them and then allow them to automatically reinvest any dividends into more shares. Reinvesting those dividends increased the number of shares owned, and when combined with per-share price appreciation often leads to significant gains over time.
DRIPs were one of the first low-cost, buy-and-hold investment strategies. Stock commissions used to run over $30 per trade, whereas many DRIP plans let you buy shares for free or just a few bucks. This allowed mom-and-pop investors to put away as little as $25 a month without the entire nut being eaten by fees.
I started learning a tiny bit about investing in the late 1990s, which was near the rise of the online broker and the beginning of end of for DRIP plans. I still remember buying a book about DRIPs from Moe’s Books (used book store that is still going!) and being very fascinated by the idea. These days, paper certificates are pretty much gone and transfer agents like ComputerShare manage DRIP plans for most companies electronically. ComputerShare manages plans for Procter & Gamble, ExxonMobil, Coca-Cola, Johnson & Johnson, Wal-Mart, AT&T, Verizon, and several more.
For the most part, there are better low-cost, buy-and-hold options out there now. Let’s take a look at the Coca-Cola DRIP plan. It costs $10 to set up, $2 per automatic purchase plus a $0.03 per share processing fee. Reinvestment of dividends cost 5% of amount reinvested up to a maximum of $2.00. You need $500 to start and there is a $50 ongoing minimum investment.
Every company has different rules, and sometimes there is a purchase price discount. However, you are still buying individual stocks so what happens when you end up holding a Enron, MCI Worldcom, or even a Kodak or Sears? You could juggle 30 different stock plans like Ronald Read did – one of his stocks bombed too but his diversification protected his portfolio – but that gets to be a lot of work and paying $2 times 30 starts adding up.
Now consider that you can buy an ETF like the Vanguard Total Stock Market ETF (VTI) with zero commission and zero setup fees from Vanguard or TD Ameritrade and holds 3,800 stocks for you all at once for an expense ratio of $5 a year per $10,000 invested. If you like the dollar-based simplicity of DRIPs (all of your $50 a month gets invested in partial shares), you can buy the mutual fund version (VTSMX) at Vanguard which supports fractional shares and free automatic dividend reinvestment.
Even if you still wanted to buy individual stocks, many discount brokers including TradeKing and TD Ameritrade offer low commissions and free dividend reinvestment. Hold one stock or 100, all on a single statement. The Robinhood app lets you buy stocks with zero commission if you have a smartphone. You can buy up to 30 stocks at once for $9.95 at Motif Investing.
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Jonathan,
While there are some downsides to picking the wrong DRiPs, I think there are several positives as well. If you are careful and choose only the plans with zero fees, I think you can really end up helping yourself. For example, if you already have a diversified portfolio via a company 401K, picking a great DRiP allows you to juice portfolio returns a bit by enjoying the growth of an individual company rather than the market return you’d get using VTI.
I started buying OKE during the economic crisis and with only $50-100/month, I’ve doubled my money even with the current collapse in oil prices. They pay a stable dividend, spun off part of their company, etc. I’ve been buying XOM for even longer. Using this website (http://longrundata.com/) I see my avg annual return has been 16% on OKE, 10% on XOM (vs ~8% on SPY). Again, this is just a tiny part of my overall portfolio but makes for a cost free way to make good returns.
Good review of DRIP plans. Actually, there are plenty of services today where you can invest directly in companies commission free. Loyal3 is one such service – you can invest as little as $10/month in companies like Coca-Cola, McDonald’s, PepsiCo, Nike etc.
Plus there is Robinhood, which lets you invest commission free pretty much anywhere.
As far as DRIP plans, I believe the one for Exxon Mobil has no commissions or costs for buying shares..
Good points! I forgot about Loyal3. Do you know of any DRiPs that actually let you buy shares at a discount to the current market price?
https://www.mymoneyblog.com/loyal3-easily-invest-in-brand-name-company-stocks.html
Aqua American for one still has a 5% discount on reinvested dividends.
The idea on DRIP discounts is pretty nice. I think that PNY and NNN and EPD had discounts on reinvested dividends at some point, but I am not sure if they still do it. In addition, the large Canadian banks also had a discount last time I looked into it ( but that was several years ago).
Good luck!
Another consideration is tax basis accounting. Brokerages do a good job tracking all of your tax lots, and you would have a ton of them in a recurring purchase/dividend reinvestment strategy like this. Not sure how well the DRIPs do; I assume they do, but they may assume the investor does.
Agreed, lots of tiny tax lots with little or no paperwork can be a huge headache. I had to deal with this partially as part of family estate issues.
Yes, VTI sounds like the best way to go. I was trying to find more information on their diversification by country. I could not find it. Some people recommend VTI paired with VXUS. Jonathan, do you have more information on this?
If you want exposure to stocks outside the US you can’t go wrong with VXUS. It basically covers the entire world stock market, minus the US. Emerging markets, Europe, developed markets, it’s all there. Low expense ratio add well, as you would expect from Vanguard. I pair my VTI (actually the Admiral fund equivalent) with the Admiral fund version of VXUS to get a total world stock market fund. You can see the diversification by region on the Vanguard website. That plus a bond fund like BND and you’ve got the three funds you need for life. Maybe throw in a little REIT if you want to get a bit wild.
+1 for VXUS and its mutual fund siblings.
Spencer, thanks for your reply. Does VTI invest in US-only companies? And that’s why you diversify with VXUS.
You could just invest in VT and let the markets dictate your US and ex-US exposure.
I closed out my last drip plan last month (DUK). In the 90s and early 2000s , this was great way to accumulate stocks. A lot of the plans didn’t have fees but now almost every plan has added or increased the fees. Drip plans with fees just don’t make financial sense anymore.
I think you’re overlooking something very important. Many companies (often utilities) such as Piedmont Natural Gas (PNY) and Aqua America (WTR) offer dividend reinvestment DISCOUNTS. If you reinvest your dividend payout they actually discount the current stock price by 5%. In my mind, you cannot beat this. It is only available through their DRIPs. Fairly stable utility type companies with decent dividends, commission free purchases and DRIP discounts cannot be beat.
I agree, a discount on dividend reinvestment is nice, but they are already rather rare and increasingly so. I don’t like the idea of just buying a company’s shares just because they offer a discount of reinvested dividends. Saving 5% on a stock yielding 5% means you’d only save $25 a year on a $10,000 holding of that stock. If an investor actually made their list of stocks they wanted to buy FIRST and then that company happened to have a DRIP plan with discount, then in that case would I consider the added trouble of opening a DRIP as opposed to just buying it from a low cost or zero commission brokerage firm.
A great aspect of using a DRIP through ComputerShare is there is no temptation to use those holdings as a margin requirement or selling it for a risky trade. It has been a great forced savings account for me. VZ does charge a dividend reinvestment fee so I have the check mailed to me and add that onto the $50 minimum reinvestment. Last month I timed checking account deduction almost perfectly and bought one day after I received check. I just noticed VZ has now created a $5 cash purchase fee and $2.50 ongoing automatic fee; it was $0 when I started. If this is true (I emailed broker and will email VZ), I won’t buy VZ anymore and will just add the dividend check onto my other current no fee DRIPs (ABBV & XOM) since it would be a 5% or 10% fee. I have paid many fees through brokerage.
I meant I emailed ComputerShare. I have just been adding VZ when I got the dividend after buying it for some time with the minimum $50 investment.
Best to purchase as an individual as opposed to an investment club. When you sell , it is very difficult and time consuming to receive funds. No clear instructions and timely response.