Buy stock one DRIP at a time
Despite a year-end rally, the stock market cooled considerably in 2004. The Standard & Poor's 500 index gained 9 percent last year versus 26 percent in 2003. But investors who pay attention to stock dividends as well as prices have plenty of reasons to be pleased.Skip to next paragraph
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"We saw a nice trend in dividends starting last year," says Kenneth Janke, chairman of the National Association of Investors Corp., an organization that serves investment clubs and individual investors. Recently, for example, General Electric raised its dividend 10 percent to 22 cents per share, while PepsiCo increased its quarterly dividend from 16 cents to 23 cents.
Perhaps no one appreciates this trend more than people participating in dividend reinvestment plans, or DRIPs.
DRIPs let investors buy a few shares at a time, then put the dividends back into the stock. Those reinvested dividends purchase additional shares (or partial shares) of stock. Meanwhile, investors can regularly purchase additional shares, sometimes for as little as $10 or $15. All this can be done without paying a fee or broker's commission. As a result, as dividends increase, investors with DRIPs own more shares.
"There's a lot of room for companies to start paying dividends," says Howard Silverblatt, an equity analyst with Standard & Poor's. "Companies are making money. The beginning of next year will be a busy period for dividends." All of which is good news for DRIP owners.
DRIPs "are a very neat and convenient way for investors to participate in the market on an averaging basis," says Edward Riley, chief investment strategist at State Street Global Advisors in Boston. Averaging refers to the practice of regularly buying shares of stock or mutual funds regardless of their price at the time of purchase. This way, the investor buys more shares when the price is low and fewer shares when the price is high, resulting in a lower "average" cost.
In addition, Mr. Riley says, "some companies give a small discount to their market price, so it makes a lot of sense for investors."
Until a few years ago, not many companies offered DRIPs. But in 1995, the Securities and Exchange Commission made it easier for corporations to put direct purchase plans in place. Since then, the number of companies with DRIPs has grown to more than a thousand, including such well-known names as Aflac, Ford, Procter & Gamble, McDonald's, and Gillette.
DRIPs "tend to be used by widely held companies," says William Mostyn, Gillette's corporate secretary. The minimum an investor needs to start a reinvestment account with a given company generally ranges from $250 to $2,500, although some companies let investors start DRIPs with just one share.
DRIPs got another boost in 2003 when the federal tax on corporate dividends was cut to 15 percent, the same rate as long-term capital gains. Before that, dividends had been taxed at the individual's income-tax rate. "With the new tax rate at 15 percent, it means more of your money is working for you if you're in a dividend reinvestment plan," Mr. Janke says.
In most cases, he notes, investors who only own a few shares actually cause their company to lose money because of the costs of processing paperwork, handling additional investments, and mailing statements. Most of these same companies, however, think it's worth the trouble.