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Dividend Reinvestment Plans: Investing On Automatic Pilot
By: Glenn
If you're like many investors who squander those small dividend checks from your
stock portfolio, a Dividend Reinvestment Plan (DRP) might be just what you need.
Just as its name implies, a Dividend Reinvestment Plan allows you to reinvest
some or all of those dividends into more stock of the issuing company. Unlike
purchases made through traditional means, partial or fractional shares, as well
as whole shares, are available.
Technically, there are two types of DRPs. The first type involves buying shares
at the market through an outside trustee. Although the company may subsidize the
transaction costs, buying shares at a discount is not allowed.
The second type allows you to purchase directly from the issuing company, which
may provide a discount from the market price. This is a distinct advantage over
buying from an outside trustee.
Besides giving dividends a better purpose than sitting in your pocket or in a
brokerage cash account, a DRP may offer other advantages as well. By buying on a
regular basis, you are “dollar cost averaging” your purchases, an investment
strategy designed to reduce volatility. Dollar cost averaging involves
continuous investment in securities regardless of fluctuation in the price. Of
course you should consider your ability to continue purchasing through periods
of low price levels. This type of plan does not ensure a profit or protect
against loss.
Secondly, many companies offer added options with their DRPs, including
purchasing stock at low minimums and sometimes even offering shares at a
discount (often 3-5%) off current market prices.
From a tax standpoint, you are subject to income taxes on the value of the
dividends whether you reinvest them or not. Your tax basis for all your shares
including the reinvested dividends is the amount paid for the original shares
plus the dividends, minus any costs deducted from your dividends as a service
charge as part of the DRP.
Keeping good records is a necessity, especially if you plan to continue
participating in a DRP over a number of years. Without the records, it may
become very difficult to track all your purchases. A little bit of effort now
can save you big headaches later on.
Usually, you will receive a quarterly statement outlining your DRP account.
Among other things, these quarterly statements will detail your on-going
investments, how many shares are held by the program, how many shares are held
be you, and the value of all your shares.
Not all companies offer DRP's but, for a list of one's that do, there are many
web sites dedicated to these plans. These internet sites not only have a full
list of companies with DRPs, they also offers online enrollment services. For
securities held in a brokerage or wrap account, check with your brokerage firm
to determine if they have the means to enroll you. If all else fails, try either
the company itself or its transfer agent.
Although it is easy to see the advantages of DRP programs to the investor, we
should not overlook the benefits to the issuing company. Besides helping to
stabilize market prices, a DRP is a relatively efficient way to raise capital
and, because companies only “promise” to continue these programs in the future,
the issuing company controls when and how much capital will be raised.
Over 1,000 companies currently offer some type of Dividend Reinvestment Plan
and, with a little research, you should be able to get on the path of “automatic
pilot” investing for the future.
Copyright 2005. LivingTrustNetwork, LLC. All rights reserved.
About the Author:
Glenn (“Chip”) Dahlke, a senior contributor to the Living Trust Network (http://www.livingtrustnetwork.com),
has 28 years in the investment business. He is a Registered Representative of
Linsco/Private Ledger and a principal with Dahlke Financial Group. |
