The Dividend Investing Resource Center

Letting Dividends Do Their Work

Inspect Your Prospectus

George L Smyth

Going through the life of a Drip, we have examined all the preliminary stages. We are now at the point where we have selected a company and are ready to make our first purchase. However, before this is done -- get that prospectus!

It is truly unfortunate to occasionally read posts where people were not aware of some of the conditions imposed on them by the company of their choice. Whether it is the fees involved or frequency of purchases, the information is fully explained in the Drip prospectus.

Merriam-Webster's Dictionary defines "prospectus" as "a preliminary printed statement that describes an enterprise (as a business or publication) and that is distributed to prospective buyers, investors, or participants." As an investor, you need to understand the plan in which you will be participating.

To be sure, the presentation of some of the pamphlets leaves a bit to be desired. My favorite confusion has got to be the Intel (Nasdaq: INTC) prospectus, where in Part 5 of their Terms and Conditions they somehow find a way to stuff 98 words into a single sentence. My English teachers would have been shocked.

However, when an investor makes the decision to commit to a decade or more of purchases, it doesn't seem too difficult to go the extra step and actually understand the rules. Doing so can answer many of the common questions posed on the discussion boards.

A common question has to do with the cost of the shares when purchased. Most of the prospectuses explain exactly how the shares are purchased, as well as how they determine the cost to the investor. By way of illustration, the Schwab (NYSE: SCH) prospectus states, "The price shall be the average price of all Company Common Stock purchased by it, as the agent for participants in the Plan, for the investment period." This means that you'll simply pay the average price incurred while they acquire stock for all Drip participants during any purchase. This is normally how things are done.

Admittedly, not all prospectuses yield complete information. Coca-Cola's (NYSE: KO)prospectus does not offer any information about how the cost is determined. A call to shareholder services found that they did not have the answer to this either. They told me that they would find the answer and get back to me. (They never did.)

Reading the prospectus helps you understand what perks might be offered. For instance, a common question is how to get a certificate to the transfer agent. Commonly, the answer returned is an expensive one, as it employs the use of registered mail to send the certificate. This is costly and may not be necessary.

Part 5 of the Enron (NYSE: ENE) prospectus begins as follows: "First Chicago Trust provides insurance coverage on certificates mailed by shareholders to First Chicago Trust for safekeeping. Certificates must be mailed in brown pre-addressed return envelopes supplied by First Chicago Trust."

If the First Chicago Trust Corporation is your transfer agent, you've got your answer. Without charge, your certificates can be sent to them with all of the assurance anyone could demand, and all you need to do is ask. Zero cost is less expensive than incurring the charge associated with sending an item via registered mail.

So, the last part of your due diligence is to understand the plan in which you have chosen to participate. Doing so will place you in the comfortable position of better understanding the process.

This website is maintained by George L Smyth