Alternatives to DRIPs

While many of the online brokerage firms I discussed earlier do offer "automatic dividend reinvestment," often at no additional commission, these "synthetic DRIPs" differ in one major respect from DRIPs and DPPs -- they don't offer the low-cost ways of purchasing small amounts worth of stock. Even with their flat-rate commissions, the online brokerage firms often can't compete with DRIPs when it comes to costs of trading. The dividend reinvestment aspect of DRIPs isn't really what gets us excited -- it's the ability to build up a portfolio without a large initial stake, adding a few dollars at a time and investing immediately in stocks. Sure, you could save up your money gradually in a savings account until you had enough to buy a thousand dollars worth of stock, but where's the fun in that?

A whole new generation of brokerage firms has emerged on the Internet focusing on low-cost, dollar-based investing, receiving fractional shares in your account when making purchases (as opposed to the share-based investing offered at traditional brokerages, where you must buy whole shares). They are similar to DRIPs in this regard, allowing you to buy and sell fractional shares in your account.

Dollar-based investing is great for new investors, since you can invest more of each dollar you have available for investing. If you had $100 to invest, and chose a stock that is selling at $12.00 per share, you could purchase 8.0 shares at a typical brokerage for $96.00 (ignoring commissions for now). That leaves $4 -- which is 4% of your original amount -- that is not invested and not working on your behalf. With dollar based investing, your $100 would buy you 8.3333 shares. When you're just starting out, these small amounts can add up to a lot.

None of these firms require a minimum to open or maintain an account, and there are no charges for reinvested dividends. Most of the firms use what is known as a "trading window," a particular time when they make all the trades requested by all customers, all at once. This is how they can offer fractional share investing -- by grouping all customer trades together, they are more likely to end up with fewer remainder fractional shares. This also keeps the costs much lower for each customer.

Many of these firms also offer full-cost immediate trades, usually at a higher commission. Sales are generally executed at a higher commission, as well. IRAs are available in many cases, as well, and some offer investment club accounts.

Costs and features differ from plan to plan, but here's an overview of the primary costs and features of each:

ShareBuilder.com offers a basic plan that allows you to buy stocks for just $4 each. Purchases of stock are made only on Tuesdays. Their Standard Plan is $12 per month, and includes six automatic purchases (additional trades are $2). Their Advantage Plan is $20 per month and includes 20 purchases, with additional purchases for $1 each.

BUYandHOLD.com's Basic Investing Plan is $6.99/month and includes two trades. All additional trades during that month are only $2.99 each.  An unlimited plan is $14.99 per month and includes no limit of automatic investments. Weekly purchases are made each Wednesday, or you can choose to make monthly or quarterly purchases.

MyStockFund.com's Basic Plan is $5.98/month and includes 2 purchases. Other plans offered include the Flex Plan at $59.99 per year plus $1.99 per purchase, or the Diversified Plan at $39.99 per year and $9.90 per month, which includes 10 Plan Purchases each month and a fee of $0.99 for each additional purchase. Plan purchases are made on Thursday.

folioFN is somewhat unique in that they focus on "folios" -- baskets of securities that you can create to become, in effect, your own mini-mutual fund. You can buy and sell the folio all at once, or buy and sell particular stocks from the portfolio. Their Unlimited plan is $29 per month; in this plan you can make as many purchases or sales as you want in their twice-daily trading windows.

If you recall my 1% rule (keep commissions and fees to 1% of each investment), then ShareBuilder becomes the most cost-effective option. For $400 a month you could buy one new stock at a $4 commission; or you could transfer smaller amounts of cash into your account until you had $400, and then make the purchase.

If you knew that you could set aside $600 or $700 a month to invest, then MyStockFund.com and BuyandHold.com become attractive, respectively, since you could buy two different stocks each month. You have to make sure that you will be making the purchases each month, though, since the monthly fee is charged to your account whether or not you make any purchases or not.

folioFN is a great option for more sophisticated investors; the folio concept is truly unique, so I suggest you spend some time reviewing their web site.

Next, we'll talk about finding and choosing stocks for DRIP style investing.

> Their Unlimited plan is $29 per month; in this plan you can make as many purchases or sales as you want in their twice-daily trading windows.

Doug,

Their latest pricing for unlimited plan is for $290 per year for unlimited folios and unlmited window trades.

Bakul

That may be the case, but they haven't announced it yet on their web site.

Doug