The DRiP Investing Resource Center
Your Location For Dividend Reinvesting Information

Three Categories of Drips - Part 1

George L Smyth

This week I would like to begin with a question I have seen more than once. I am glad to see the question, as it means that when unsure, people are using the forum before acting. However, the question tells me that those of us who have been around the block more than once need to work harder to get the word out.

The question is, "Can anyone besides BuyAndHold buy your first share for your Drip?" The question is looking for a category three solution to a category one situation. Allow me to explain.

When we talk about Dividend Reinvestment Plans on the boards, companies fall into one or more of three categories: standard Drips, direct plans, and "Pseudo-Drips." We need to ensure an understanding of each category. Since this can't be done with a single swipe, I will discuss these over the next few weeks.

The first category is that of companies offering the standard Drip plan. One can find a complete list of these companies at www.MoneyPaper.com, which maintains an exceptionally informative website. The two means of entering the standard plan are 1) to use a service like Temper of the Times (affiliated with MoneyPaper) or www.Better-Investing.org, or 2) to do it yourself.

For a nominal charge ($20), Temper will purchase the minimum number of shares to qualify for the plan (they also have an option to purchase more than the minimum). Following purchase, they will register the shares in the purchaser's name and send the appropriate information to the company's plan administrator for establishment in the company's Drip.

Doing things yourself is not complicated. After purchasing your initial share (or shares) through a discount broker, you need to request the certificate. This is because the real owner of the share you purchased is the broker, not you. This stock is commonly referred to as being in "street name."

When you obtain the stock certificate, you become the actual owner of the stock (check with your broker as there may be a charge for this service). The only other step is to request an application from the company's transfer agent. After filling it out, you're done.

The second category is that of direct investment plans. These companies generally offer an entry into the Drip through an initial large purchase, which commonly ranges from $250 to $1,000.

All companies offering a direct option also offer a standard option, but it doesn't work the other way around. This direct option allows one to get going with the plan more quickly than purchasing through a discount broker or using a service to get started. Of course, with the decision to make numerous purchases over at least the ensuing decade, a month either way is inconsequential.

Another advantage is that the direct option may be a less expensive way to start. As each company's requirements are different, it is worthwhile to make a comparison before coming to a decision.

Regardless of which direction one chooses, the end result is the same: enrollment in the company's plan. The only difference is how one gets there.

The third category may or may not involve dividend reinvestment, and has nothing whatsoever to do with the company's plan. This makes it odd for inclusion in this discussion. However, as we have broadened the board conversations to include dollar cost averaging in general, anything that makes this strategy affordable to us "hundredaires" and "thousandaires" is fair game. This third category is the "Pseudo-Drip."