Once the province of stodgy utilities and local banks, DRIPs (or Dividend Reinvestment Plans, also known as Direct Investment Plans) have come a long way in helping small investors establish a widely diversified portfolio. The DRIP “universe” now stretches into almost every industry, including high-tech, biopharma, energy, mining, and media. And a company doesn't necessarily have to pay a dividend to establish a direct investment plan, although most do. Nor are they limited to American companies, since most of the best known foreign firms offer plans that invest in their ADRs (American Depository Receipts).
DRIPs generally require ownership of just one share to enroll (or direct-enrollment minimums of $250 and up) and allow for subsequent investments of as little as $10, $25, or $50, but also accept hundreds of thousands per year, if the investor chooses. In addition, many plans now allow participants to choose partial or no reinvestment, often providing direct deposit of dividends to a bank account. So if dividend reinvestment is not your thing, you can still use the plans as a convenient means of accumulating shares in small-dollar amounts, paving the road to dollar-cost averaging and diversification as excellent risk-reduction strategies. You can check whether a specific company offers a DRIP by using the Search function here.
The Year (So Far) in Review
January got off to a great start with the introduction of a no-fee DRIP by Dr Pepper Snapple Group (DPS), which announced its first quarterly dividend of 15¢ per share (since raised to 25¢) in November, to be paid January 8. The company, which was spun off by Cadbury (CBY) in 2008, also committed to the repurchase of $200 million worth of its stock over the next three years. Other new plans that debuted in January included Berry Petroleum (BRY), The Brink's Company (BCO), and Danvers Bancorp (DNBK).
You might recognize the Brink's name as the armored-car company that was founded in 1838. (It later spun off its home security firm, which was recently acquired.) Berry is an oil and gas company founded in 1909 that operates properties in California, Texas, Utah, and Colorado, while Danvers was founded in 1850 and operates 26 branches in Massachusetts.
February brought the introduction of DRIPs by Cedar Shopping Centers (CDR), Government Properties Income Trust (GOV), Lincoln Electric Holdings (LECO) (which requires 100 shares), QNB Corp. (QNBC), Renesola Limited (SOL), and Vivo Participacoes SA (VIV), the last two of which are ADR companies. Lincoln Electric has increased its dividend for 15 straight years and QNB has boosted theirs for the last 14.
In March, a new DRIP was introduced for American Water Works (AWK), a company that was founded in 1886 and serves about 16 million people in 35 states and two Canadian provinces. The company, which had been a long-time dividend increaser, was acquired in 2003 by Germany's RWE. It came public again in 2008 with RWE still owning 60% of the shares- a figure that had been reduced to 49% recently. (RWE stated its intention of eventually disposing of all of its shares.) AWK initiated quarterly dividend payments in August 2009 and raised them from 20¢ to 21¢ a year later. On March 25, a new DRIP took effect for Starbucks Corp. (SBUX), which had announced its first-ever quarterly dividend of 10¢ per share the previous day, along with a share repurchase of 15 million shares. (The company also had 6.3 million shares remaining on its previous buyback.) Spokesmen for the ubiquitous coffee chain, which was founded in 1985, said that the company was targeting a payout of 35-40% of earnings.
April brought a trio of new DRIPs, starting with The Female Health Company (FHCO) on April 6. The company, which markets a female condom to protect against sexually transmitted diseases and unwanted pregnancy, initiated quarterly dividend payments in January at 5¢ per share. April 19 was the effective date for a new DRIP offered by Quest Diagnostics (DGX), which offers a variety of clinical testing services for blood chemistries, urinalysis, allergies, pregnancy, and substance abuse. Quest has been paying a quarterly dividend of 10¢ per share since 2006 and trading since 1996. A third Direct Investment Plan debuting in April came from Dollar General (DG), despite the fact that the company is not currently paying a dividend. Founded in 1939, the discount retailer had been taken private in 2007 after a long history of increasing its payout year after year. It went public again in November 2009, but Kohlberg Kravis Roberts and Goldman Sachs still own 87.9% of the common stock.
The only new DRIP introduced in May came from Core Laboratories NV (CLB), a Dutch oilfield services provider with 70 offices in 50 countries. (About 51% of sales originate outside the United States. Dividends were initiated in 2008 and, like those of many ADRs, can be somewhat irregular. The stock is expected to be split 2-for-1 on July 8, subject to shareholder approval.
On June 1, the former First American Corp. spun off its title insurance unit as First American Financial (FAF) and renamed itself CoreLogic Inc. (CLGX). Although an existing DRIP was inherited by the parent with the new name, an identical plan was launched for the newly spun-off company. The new FAF announced that it would begin paying quarterly dividends at 6¢ per share. CoreLogic, which had been paying a quarterly dividend of 22¢ per share, has not made a subsequent announcement, so the status of that payout is uncertain at this time.
As the activity in the first half of 2010 demonstrates, more companies from virtually every industry are introducing Direct Investment Plans as they recognize the value of providing this option to new and existing shareholders, who can be expected to return the favor in the form of brand and corporate loyalty.
A very positive trend is that companies are adding DRIPs very soon after initiating dividends, if not in conjunction with such announcements. On the negative side, most of the new plans carry some fees. But investors can minimize the impact of fees by investing larger amounts less often. For example, investing $250 translates to a 1% fee in a plan that charges $2.50 per investment. And, as many participants are finding out, plans often charge less for online investments than they do for processing paper checks. (A plan that charges $5 for an investment by check may only charge $1 or $2 for an investment by EFT, or electronic funds transfer, and those transaction are executed more quickly.) Best of all, though, many traditional DRIPs, like those offered by 3M Company (MMM), Johnson & Johnson (JNJ), or Union Pacific (UNP), charge no fees for dividend reinvestment or optional cash purchases.
Disclosure: Author owns MMM, JNJ, UNP