There are a couple of good ways to be involved with dividend reinvestment programs, and one bad way.
When I originally started writing about dividend reinvestment programs for The Motley Fool twenty years ago there were three ways to get started with DRiP investing. The first means of doing this involved companies like BuyAndHold, which ended operations in 2015 and moved their clients to a folio investing solution.
I will not be covering folio trading in this series but will explain what it is, using Folio Investing as an example.
Folio trading allows one to create their own portfolio of stocks on the broker’s platform. Folio Investing has groups of pre-selected portfolios that one can take as is, or can be modified to accommodate one’s preference to weighting. Building a portfolio from scratch of specific stocks is also a possibility.
This does come at a cost. Folio Investing’s least expensive plan sets one back $15 per quarter, plus $4 per purchase. The basic plan allows only three trades during the quarter, which is a problem for those whose strategy is to make multiple purchases each month. This limitation can be accommodated on their platform, but doing so moves one to the more expensive plan, which rockets the cost to $29 per month (or $290 per year).
As one who seeks to minimize costs (which is one of the real powers with dividend reinvestment plans), this just does not work for me.
The first way to DRiP that does make sense is to work through a broker, not something that would have been feasible years ago. This does not fit into the traditional mold of dividend reinvestment programs but achieves its goal in the same manner. For this example I will look at TD Ameritrade.
The TD Ameritrade website indicates that they offer everything the DRiPper seeks to accomplish. Their platform advertises fee-free purchases of stock, so multiple purchases of companies could be done each month. The company also offers a dividend reinvestment program without cost, so that barrier is reached. And finally, partial shares can be owned.
There may be limitations on these offerings that do not work. For instance, when making a purchase one needs to specify the number of shares as opposed to the purchase amount. This means that you cannot purchase fractional shares. If you wish to invest $100 and the share price is $51 then the $49 will need to wait for another day. That said, for the advantages TD Ameritrade offers, this is probably going to be an acceptable limitation.
At the time of this writing (10 Dec 2019) there could be a small catch. TD Ameritrade is going to be acquired by Charles Schwab. Although I could not find information anywhere on Charles Schwab’s website, I spoke with a representative who told me that they do have an option to reinvest dividends and hold fractional shares, so this may not be an issue.
I have had experience with this in the past. I originally purchased stocks through a company (long forgotten) that was acquired by Zecco, which was then acquired by Ally. The reasons for selecting a company to do business with may not be transferred to the new company, so one simply needs to be aware of the situation and be ready to reevaluate their decision.
My grandfather worked for AT&T and over the decades, being an employee, he was able to accumulate a large number of shares of the company. Each paycheck some of his money went to the company and was invested in their stock, with the dividends reinvested. Generally speaking, this is the traditional means of participating in a dividend reinvestment program.
For one to be able to participate in a company’s DRiP they must initially be the actual owner of that company’s stock. This is not as straightforward as one might think. Purchasing shares of a company through a broker does not actually mean that one owns those shares – they do not – the shares are owned by the broker for the client. This is called owning shares in street name.
Brokers hold stock in street name for convenience. A lot goes into the transfer of stock from one entity to another, and were the broker required to convert ownership for every trade, the overhead would be time-consuming and costly. Of course, owning stock in street name still gives the owner all of the rights that are afforded to the true holder of the stock.
To be allowed to participate in a dividend reinvestment program one must own a certain number of shares (usually just one) in the company. This means that while one can make a purchase through a broker, they can only be the actual owner of the stock by asking the broker to transfer the stock to them.
This involves the issuance of a stock certificate, and there will probably be a cost associated with this. For instance, looking at the fees listed on eTrade and TD Ameritrade the cost is $500 for the service, which sounds crazy to me, but their business model is one where the customer is expected to do most of the work, so it is something that is discouraged. There was a time when this service was free but that time has probably passed.
Fortunately, there is a less expensive and more convenient way to do this. DirectInvesting.com can make the purchase as well as enroll the customer in the company’s dividend reinvestment program for 1/10th of this cost (less if the company one wishes to purchase happens to be their monthly special). I have used their service in the past and can attest to the convenience of not having to obtain a physical stock certificate, mail it to the company (which should be done with the added cost of using registered mail), and fill out the application form for the program.
Although all of the holdings in my DRiP portfolio were obtained through this traditional route, I cannot think of an advantage I hold over someone who has decided to obtain their shares through a discount broker like TD Ameritrade as outlined in the previous article. Whichever route is taken, making numerous purchases of great companies over a long period of time and having the dividends reinvested will yield great benefits.