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Drips vs. Inexpensive Brokers 

George L Smyth

We ease into 2001 with one of the most common questions asked on the Fool's Drip investing boards -- "How do I buy my first share?" Typically, Fools must first decide whether they wish to enter a company's officially sponsored Drip, or go the "pseudo-Drip" path, provided both options are available. In my mind, the decision should be dictated primarily by cost.

I would suggest that, if the company offers a fee-free Drip, the most obvious decision is to use that. Buy your first share through the plan if possible, or else use a discount broker (or a Drip facilitator likeMoneypaper) that charges low fees for trades and for stock certificates. There are two commonly offered reasons for shunning the fee-free Drip in favor of accepting the fees of the pseudo-Drip companies (most notably BUYandHOLD and ShareBuilder.com). These reasons involve convenience and timing.

There is a certain level of convenience afforded to the participants of pseudo-Drip offerings. An investor merely needs to ensure that the "buy" selection criteria entered in the site's database is correct, and click to buy. The company automatically pulls the funds from the customer's bank and makes the stock purchase. It doesn't get a lot more convenient than that.

This convenience is opposed to the task of writing a check and entering the information into a spreadsheet (or spreadsheet product like Quicken or Money) when buying from most traditional Drips. Writing the check takes me about one minute, entering the information about 30 seconds, and entering the confirmation later takes about 30 seconds. I put out the mail when I collect it, so I don't need to count that time.

I could do this about 30 times in an hour. Multiply this by the fee associated with the least expensive pseudo-Drip company, and that translates to about $60 per hour. Until I start making more than $120,000 per year (sure, that will be possible -- when hamburgers cost $25), I think that I will save that money (and really that time value of money) for my Drip purchases.

Over and above this, the small change (two or three dollars per trade with a psuedo-Drip) saved by setting aside two minutes per company per month to use a free Drip does actually add up. Over 20 years, assuming a $2 per company purchase fee, three "Drips" purchased on a monthly basis will cost you lost value of well over $5,000 in total -- assuming that the money could have been used instead to purchase free Drips and accrue 11% per year. Personally, I will be more than glad to forsake an occasional few minutes in exchange for a nice chunk of change when I need it years from now.

The other factor is one of timing. This aspect takes two directions, as the two primary pseudo-Drip companies offer differing degrees of timing capabilities. BUYandHOLD purchases stock during the half day of one's choice (morning or afternoon), whereasShareBuilder.com makes purchases on Tuesdays. The difference in purchase fees is that the former charges $0.99 more than the latter.

Can one find enough advantage in timing purchases to justify the fees that will allow this? I would imagine that will vary with the individual. People known as money managers are paid specifically to do just this (time their purchases), and they have great difficulty performing as well as the S&P 500 Index. Of course, there is nothing to say that Fools couldn't do better -- sometimes they probably could.

However, I will make two suggestions in this regard.

The first is to test one's ability to time purchases by making imaginary purchases over the course of half a year. Compare the gains (or losses) against what would have been achieved by going through the fee-free Drip itself. If you find that you can actually benefit by timing your purchases then you have a case for doing so.

The other suggestion is to open a pseudo-Drip account. Then you can decide when you wish to utilize their services. My plan would be to engage in the fee-free Drip. If a buying opportunity comes about, then make the additional purchase through the Pseudo-Drip account, too. This "hybrid" investing seems to offer the best of all worlds. We'll talk more about it later.