Advantages (and Disadvantages) of DRIPs

There are two sides to every story, so I want to talk a little bit about the mechanics of DRIP investing, and the pros and cons of buying stocks using these plans.

On the plus side, DRIPs can have low minimums and low fees for buying shares, making it an inexpensive way to invest in stocks. On the negative side, DRIPs can have high minimums and high fees! You have to review the DRIP prospectus carefully so that you understand all of the related costs before you enroll, making sure that those costs fit your budget.

On the minus side, you usually don't have too much control over the price of the shares that you purchase. Your reinvested dividends buy shares at the price on the date the dividends are paid, and you generally have to send a check for an optional cash purchase a few weeks in advance -- and the price might go up significantly in the time between your decision to buy and the actual purchase. On the plus side, the price might go down by the time your OCP is made or be lower on the reinvestment date. Chances are that it all evens out in the end. And some plans even execute purchases and sales on a daily basis.

On the plus side, many DRIPs offer automatic investing plans where you can set up a regular transfer from your bank account to the DRIP to make an optional cash purchase. These make it easy for you to invest regularly and take advantage of dollar cost averaging to reduce your overall per share cost over time. On the minus side, "automatic" means "automatic," which, as above, means you have no control over the purchase price.

On the minus side, it can take a couple of weeks to cash out of a DRIP if you ever need the cash. On the plus side, this may mean that you're less likely to sell your shares for some, let's just say, frivolous purpose.

On the minus side, if a stock doesn't offer a Direct Purchase Plan, it can be complicated and time-consuming to set up an account. On the plus side, it's a one-time effort to set up a DRIP, and if you use one of the 400 Direct Purchase Plan stocks, it couldn't be easier to start.

On the minus side, DRIPs entail many transactions over the course of the year, all of which affect your cost basis and ultimately the capital gains or losses on which you may have to pay taxes, and thus must be recorded carefully and all transaction records stored securely. On the plus side, this kind of record keeping isn't really a problem if you have a tool like the Investment Account Manager. This program couldn't be any easier to use and will take care of all of your record keeping tasks. And this next issue is both a plus and a minus, depending how you look at it -- you can avoid any tax considerations whatsoever if you die and leave your DRIP holdings to your heirs. The cost basis of the shares will be stepped up to the value as of your date of death (or as of the date six months later), so the cost basis issue becomes moot.

On the minus side, only about 1,500 companies offer DRIPs, out of the 7,000 companies that trade on the major U.S. exchanges, so your selection of stocks is limited. On the plus side, there are several thousand stocks on the major U.S. exchanges that wouldn't make suitable investments for anyone with an ounce of common sense in their head. Chances are excellent that you can find at least a handful of the 1,500 DRIP stocks that could be part of a sound portfolio.

On the minus side, DRIPs are not suited for investors who aren't willing to do their homework and carry out research on potential investments. On the plus side, if you're reading this, you're probably not one of those people.

On the plus side, many DRIPs offer other benefits, such as IRA or Education IRA accounts; the ability to have dividends paid in cash but still have the option to make OCPs in the plan; streamlined ways of transferring shares to other individuals as a gift; discounts on purchases and/or reinvestments; and certificate safekeeping services.

Next, we'll look at one more alternative method of investing in stocks that combines the benefits of DRIP investing with the advantages of a brokerage firm.