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Thread: Common stock dividend reinvestment plans.

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    Default Common stock dividend reinvestment plans.

    I searched for this because I remembered reading an older thread from a search done months ago, but that thread must have been erased during a major crash (the server here, not the stock market)!

    A DRiP or DRP means "dividend reinvestment plan." It's a method of purchashing common stock a small portion at a time. You can sometimes purchase only one share of stock and then purchase more stock each month, a little at a time. Sometimes this can be as low as $25.00 a month. Maybe even $10.00 a month, but the $10.00 per month programs will be few and far between. There usually isn't any requirement to purchase anything on a monthly basis, but if you add $25/50/100 per month, you'll be doing what is known as "Dollar Cost Averaging." It just means you'll be purchasing stock at a higher price some months and at a lower price other months. It helps in slightly reducing your risk.

    While a mutual fund will provide much more effective diversification, purchasing one corporation's common stock via a DRP can help you "get your feet wet" in learning about the stock market if you've not invested in it before. Each quarter, the dividends you will earn from the stock will usually be used to purchase more common stock, along with any additional payments you choose to make each month.

    Hmmm...I'm not doing such a great job of explaining this here, so I'll defer to Melonie, Monty and others to explain more fully. But to continue, there are several companies, such as Procter & Gamble, where you can establish a program in your name directly with the company with an initial investment of $250.00 minimum. I will also post three links I know of where you can purchase a first share of stock in order to establish a dividend reinvestment program. I do not remember the exact subscription rates and DRP setup fees for these three programs offhand.

    The newsletter, The Moneypaper, which usually has several financial articles each issue

    http://www.themoneypaper.com

    First Share

    http://www.firstshare.org


    and BetterInvesting(formerly the NAIC or National Association for Invertors Corporation). This is more for investment clubs, but the last I heard, they allow individuals to join and use their stock purchase program too.

    http://www.better-investing.org

    Now, whether any given company is a good investment is open to debate, and once again I'll defer to others here regarding the desirability of common stock investments.

    However, I highly recommend purchasing at least one common stock via such a program, where you don't have to risk a lot of your money, but can have a good learning experience as to how the stock market functions, and see if you might want to either invest more or completely avoid the stock market in the future. Depending on your outlook, you might expect another 1929, although there are constraints in place now in an attempt to prevent that from ever happening again. And your own outlook might be very "bullish" instead of "bearish"-anyway, have fun if you do decide to "get your feet wet" in the market.

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    Default Re: Common stock dividend reinvestment plans.

    In the past, DRiP programs were established by certain companies for the stated purpose of helping their stockholders avoid high brokerage fees when purchasing additional shares of that company's stock. The unstated purpose was of course to encourage the purchase of additional shares.

    However, in today's world of deep discount online brokerage, and extremely complex tax rules with automatic IRS reporting, DRiP programs can make life much more complicated from a true profit versus tax consequences standpoint than is evident on first impression. As a 'get your feet wet' learning tool, joining a DRiP program and having to deal with OID's i.e. differences in tax basis between the shares bought on the open market versus DRiP shares, and having to deal with differentiating the 'value' of some DRiP's counting as additional dividend versus other DRiP's counting as investment expenses, plus having to keep separate records for every group of DRiP shares purchased, is enough to give ME a headache let alone a newbie investor !



    Also, IMHO at least, attempting to save $7 on commissions via a DRiP program is not a sufficient reason to continue investing in a particular company's stock. If the stock is a 'hold' or a 'sell', IMHO DRiP programs only throw more good money after bad. If the stock is a 'buy', spend the $7 on commissions and buy a block of shares through a discount broker.

    In the rare case where a company is forecast to continue doing well over a period of many years, and where that company also offers a DRiP program, and where that company's DRiP program offers DRiP shares at a true discount without hidden expenses, then joining that company's DRiP program might make sense. However, IMHO at least, in the majority of cases DRiP programs create much more record keeping and tax filing complexity than they are truly worth - as well as distracting the stockholder from making truly objective 'buy' versus 'sell' decisions about that company's stock.
    ~
    Last edited by Melonie; 01-07-2006 at 11:22 AM.

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    Default Re: Common stock dividend reinvestment plans.

    A DRIP program is a vehicle for the long-term accumulation of a companies stock. It is not designed as a a trading vehicle nor does it provide the kind of record keeping to make that attractive.

    The bookkeeping consequences for a long-term accumulator in a company are far from onerous. Every statement from a DRIP program I have ever seen has both a current quarter and a year-to-date statement of activity--that means you have one piece of paper to deal with for each year for the company. Contrast that with a brokerage statement, where you have to have up to 12 pieces of paper/year to save, and each investment is not on a separate sheet, If you want to sell a stock in 2006 that you began to accumulate in 2003, you may have to look through up to 36 sets of pieces of paper to note all activity in that stock. In that case the statements of a DRIP it is no more complicated to track than a monthly checkbook balancing--indeed a simple check-register is a handy tool to track such an investment.

    While not a vehicle for all stocks, and not a trading vehicle (trades are often done on a certain day of the month, rather than the day of request), it is a way to do what Phaed said, dollar-cost average, with no commission for a person who wants to accumulate a stock over a period of time. It can be an effective vehicle to accumulate a high-dividend stock such as a utility or a slow-steady growth company such as Phaed gives as an example (PG or a consumer company like Johnson and Johnson, both of which I own in an IRA where there is even less paperwork issues for such a holding). Be aware part of what you may give up for this is daily liquidity if a shock-event changes the companies fortunes suddenly.

    In short--not for all companies or all trading styles. Not a high-volume vehicle or a trading vehicle in any sense. Good for some companies, not for others.

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    Default Re: Common stock dividend reinvestment plans.

    It's heartwarming to hear that Monty and I agree in essence on the virtues and shortcomings of DRiP programs.

    I would only add that if your brokerage provides consolidated year end statements for 'standard' stock transactions (which most now do), then the recordkeeping and tax reporting burden for DRiP program stocks vastly exceeds those of your 'standard' stocks which appear on the annual consolidated brokerage statement (assuming that accumulation of DRiP shares has taken place in many small lots over many months/quarters). For example, if you gradually accumulate 2-3 shares per month in a DRiP program, and eventually decide to sell 100 shares of DRiP stock, you'll have to make 33 to 50 individual transaction entries on your tax return showing the different cost basis and different cap gain amount for each monthly group.
    Last edited by Melonie; 01-08-2006 at 01:29 PM.

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    Default Re: Common stock dividend reinvestment plans.

    Quote Originally Posted by Melonie
    It's heartwarming to hear that Monty and I agree in essence on the virtues and shortcomings of DRiP programs.

    I would only add that if your brokerage provides consolidated year end statements for 'standard' stock transactions (which most now do), then the recordkeeping and tax reporting burden for DRiP program stocks vastly exceeds those of your 'standard' stocks which appear on the annual consolidated brokerage statement (assuming that accumulation of DRiP shares has taken place in many small lots over many months/quarters). For example, if you gradually accumulate 2-3 shares per month in a DRiP program, and eventually decide to sell 100 shares of DRiP stock, you'll have to make 33 to 50 individual transaction entries on your tax return showing the different cost basis and different cap gain amount for each monthly group.
    Sorry Melonie, but only one transaction. All you have to account for in detail is the cash you got from the broker, and your cost basis for the sum. You do have to account for the difference between short and long gains separately, however, but it is one sale and they care about the revenue. You do have to maintain the record of the purchases, but in your example that is keeping a xerox of two-three pages for the years you bought it with your annual tax filing. If your example were true people would sell stock the day a split was announced to avoid paperwork. If Dan sees this maybe he could pronounce definitively who is correct. Dan? Beuler? Hehe he.

    And Melonie, your heart is well insulated, so it does not need warming. Melonie does have a major point that some things are good for some people, and others are better for others. No information/advice is one-size-fits-all....these are dress shoes, not flipflops. The major advantage of a professional accountant or financial adviser is akin to a tailor who knows the precise size (so to speak) or the wearer, and how to get there or as close to there as possible.

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    Default Re: Common stock dividend reinvestment plans.

    The major advantage of a professional accountant or financial adviser is akin to a tailor who knows the precise size (so to speak) or the wearer, and how to get there or as close to there as possible.
    there are now TWO points where we appear to be in complete agreement !

    again not wanting to prolong the agony, but if that block of say 100 shares to be sold have 33 or 50 different cost bases for original purchase of the shares 2-3 at a time at different market prices through a DRiP, there IS a whole lot more accounting and tax reporting required than a single transaction with a single cost basis.

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    Default Re: Common stock dividend reinvestment plans.

    see page d-6 of this http://www.irs.gov/pub/irs-pdf/i1040sd.pdf
    first full paragraph of second column.
    "If you sold a block of stock (or similar
    property) that you acquired through several
    different purchases, you may report the sale
    on one line and enter “VARIOUS” in col-
    umn (b). However, you still must report the
    short-term gain or (loss) on the sale in Part I
    and the long-term gain or (loss) in Part II."

    Your receipts in sales have to match the 1099s or you have a risk of getting audited because the IRS is not going to search every possible combination you could have put in different rows.


    Melonie, since the default basis calculation is done as first-in-first-out, it is not hard to know the average price paid. You find the first x shares bought and what they cost

  8. #8
    Sitri
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    Default Re: Common stock dividend reinvestment plans.

    Without going into PAINFUL tax law, it just doesn't make sense. From an investment standpoint, any potential, implied, or whatever savings is more than lost from the inability to freely buy stock A and then sell stock A to buy Stock B whether in 1 year or 5 years.
    Rarely does any company year after year become the BEST place to put your money.
    It violates the ability to diversify or to be liquid to a large extent. .... Unless you are an employee and investing in Enron.

    I think we agree but for different reasons.

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    Default Re: Common stock dividend reinvestment plans.

    Quote Originally Posted by Sitri
    Without going into PAINFUL tax law, it just doesn't make sense. From an investment standpoint, any potential, implied, or whatever savings is more than lost from the inability to freely buy stock A and then sell stock A to buy Stock B whether in 1 year or 5 years.
    Rarely does any company year after year become the BEST place to put your money.
    It violates the ability to diversify or to be liquid to a large extent. .... Unless you are an employee and investing in Enron.

    I think we agree but for different reasons.
    While DRIPs are not an optimal vehicle for everyone Sitri kind of overstates the negatives. While you lose the flexibility to buy at price A and sell at price B, stocks with a dominatnt trend will average out with purchases below and above trend, plus if you think the price is above trend for some reason, just either do not buy any, or sell your holdings and shift to another stock. Consumer goods stocks like J and J, PG, etc, have beta or volatilities less than one (they are less volatile than the s&p500--not lower return). to demonstrate this just do a long-term chart at yahoo vs the dow or S&P. Both have beat the market long term by a wide margin.

    IT does not violate diversity of holdings because you can own as many of them as you want, and there is no requirement to buy anymore and you can stop buying or sell at anytime--you just cannot use it as a vehicle to time specific buy and sell points. If you want to do that do that in a regular commision account. It is liquid, just not daily or weekly liquid. As stated before, it is for slow motion investments and long-term accumulation, not trading.

    From a consumer perspective it is like buying coffee more so when it is on sale as a cushion against a price spike (and they do happen) as opposed to plunging when you think the coffee is cheap (because store B down the street may have a sale next week and you paid too much). You may not have waited for the ubber-sale, but you are protected from running out and having to buy it a quicky mart for $5-6. Again it can be useful, but not optimal for all styles or budgets. Not all investors can buy in efficient volumes (100 share blocks and the time it takes to get large chunks means you are chronically passing up a higher long term return in a savings account paying 2%). Nothing is right for everyone at all times. No one ever said 100% of your money should be done this way, 100% of all stocks are good investments to buy this way, or all people should do it.

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