I have written before (click here) about how DRIP programs are excellent ways for the small investor to build meaningful wealth over the long term by adding $50, $100, $200 (or whatever the amount may be) to a blue-chip company over time so you can accumulate piles of money over 10+ year stretches as you benefit from your accumulated contributions and the accumulated dividend growth that a well-chosen company can provide.
Of course, as is the case with anything else in life, a deal is only as good as the terms presented. Companies like Exxon Mobil (XOM) and Procter & Gamble (PG) are the friend of the long-term investor because they allow you to have money taken out of your checking account free of charge each month, and they also reinvest the dividends for free. These companies get an A+ when it comes to shareholder friendliness.
But, as you might expect, not all companies allow you to invest on good terms. Today, I want to highlight three of the worst DRIP Programs in the country that you should probably stay away from if you only plan to invest $50-$150 each month because they charge such exorbitant fees (which effectively siphon off your wealth and dilute the effects of compounding).
First off, let's take a look at Coca-Cola (KO). You'd expect this blue-blood company to take care of the small shareholder, right?
Not so. The fees associated with this DRIP Plan are terrible. First, you have to pay $10 to set up an account. From there, you have two options: you can either have money taken out of your checking account each month (which costs $2.00), or pay the company $3.00 if you write a check to acquire Coca-Cola shares. Those terms are terrible. For every $100 you give the company, you're giving away 2-3% of your asset base right off the bat. It's hard to get rich that way.
But the pain does not stop there. For each share you buy, Coca-Cola tacks on an additional $0.03 purchasing fee (at this point, they're just insulting you). You can't even get away with reinvesting your dividends in the clear. The company charges 5% to reinvest your dividends, all the way up to $2.00. The company currently pays a quarterly dividend of $0.28 per share. That means that you have to pay a 5% fee on your first 360 shares (roughly) every quarter, and once you amass more than that, you have to pay a flat fee of $2.00 every quarter thereafter (of course, as the dividend grows or declines, the terms change).
And lastly, the company hits you when you decide to sell. You have to pay $0.12 for each share that you decide to sell, plus a $15 fee if it is a generic sale or $25 if you specify a market order sale. If you're only investing $100-$200 per month, these fees will take an ax to your total returns (incidentally, most companies are receptive to requests to change their DRIP programs. I encourage you to click here and let Coca-Cola know that you'd like the company to eliminate the DRIP fees. Stranger things have happened, especially considering that the fees increased during the CEO tenure of Donald Daft, whose reputation Coca-Cola is still trying to get away from. Considering this is an easy, common-sense way for Coca-Cola to acquire new shareholders, generate good PR, and perhaps even get more satisfied customers; you might be able to make a change on this one if you let them know).
The fees at Coca-Cola's DRIP plans are especially inexcusable considering that smaller rival Dr. Pepper (DPS) takes care of small shareholders by charging no fees at all for the purchase of shares or reinvestment of the dividends.
The next blue-chip company that has an unfavorable DRIP program is AT&T (T). Although not as egregious as Coca-Cola, it is a shame that AT&T charges any fees at all. After all, this is the company whose name came to be synonymous with "widows and orphan stocks", and if there is any stock out there whose existence conjures up images of little old ladies taking $100 out of their paycheck to acquire stock, it is this company. That's why I'm sad to report that it charges fees for each purchase, and even charge for reinvest.
If you mail in a check, you have to pay $2.50. If you have money taken out of your checking account regularly, the fee is a more tolerable $1.00 per transaction. But the company literally nickels-and-dimes you further from there. Each share you buy through an additional purchase costs $0.05. And if you accumulate a share due to reinvested dividends, you have to pay $0.10 plus 5% of the amount reinvested up to $2.00.
As Benjamin Franklin said when he wrote Poor Richard's Almanack, "a small leak can sink a great ship." In a world where brokerage houses like Schwab automatically reinvest your dividends for free, you shouldn't have to deal with the obnoxious frictional taxation of $0.10 per share and 5% of the reinvestment price. These plans purportedly exist to benefit the small long-term investor, yet companies like AT&T attach terms to their plans that discourage the long-term accumulation of shares by charging a fee at every step in your dealings with them.
And lastly, there is Altria (MO). It's a shame that the company charges for dividend reinvestment, considering that the reinvestment of dividends back into the company has been a long-term driver of the company's success (if you read Professor Jeremy Siegel's work Stocks For The Long Run, you will learn that Philip Morris was the best-performing stock from 1926-2003 because the company paid a high dividend that got reinvested at attractive prices).
The problem with the Altria DRIP Plan is that investors have to deal with fees on their reinvested dividends, which has historically been the long-term driver of Altria's returns. You have to pay Altria 5% of your dividends (up to $3.00) for each dividend check you receive, and when you purchase your shares, you have to pay $5 every time you send in a cash check or pay $2.50 every time you have money taken out of your checking account.
Coca-Cola, AT&T, and Altria are three companies historically associated with buy-and-hold investing. But if you are dealing with monthly amounts of a few hundred dollars per month, I strongly encourage you to refrain from starting a DRIP with these programs. On small investments, these obnoxious fees will eat you alive. You're much better pooling your money together, and then making a one-time purchase with a $8.95 fee at a major brokerage house, instead of bleeding slowly due to the plans of these DRIP programs. I am big fan of DRIP investing for small shareholders, but the fee structures at these three blue-chips should deter you from participating in these plans.