Depending on your stage in the wealth-building process, there are different things that you are likely to worry about in the execution of your investment strategy. For instance, someone that has $500,000 is probably worried about brushing up against SIPC insurance limits in a brokerage account and is probably exploring global custody options through a firm like Northern Trust so that he can be sure his assets are safe in the event of a brokerage failure. Someone just starting with only $100 or $200 to invest is probably more focused on keeping costs low, because it's hard to get rich when you're paying $49.95 at a full-service brokerage to invest $500 or $8.95 at a discount brokerage to invest $100.
Today's post is aimed at those who are curious about the nuts and bolts of cheap DRIP investing. I have received many requests from readers that want to invest in individual stocks, but only have the available funds to put aside $50 to $100 into a particular company. For these investors, keeping costs to a minimum is absolutely crucial. I have often made allusions and references to DRIP Investing, but I have never offered an explanation as to how to logistically set up DRIP accounts. Today, I will attempt to do that.
The best place to begin is by clicking here to visit a link on the Computershare website. This is the big daddy of stock transfer websites. When you click on the link that I provided, you will be taken to a list of all the companies that don't charge purchase fees (I manually applied that filter already) for investors. You will see excellent firms like Abbott Labs (NYSE:ABT), Exxon Mobil (NYSE:XOM), Dr. Pepper (NYSE:DPS-OLD), and Lockheed Martin (NYSE:LMT). Some of these firms, like Dr. Pepper, charge $15 to initiate the DRIP plan, and then all cash or electronic debit purchases are free thereafter. Some, like Exxon Mobil, do exactly what they claim: they charge nothing to set up an account, and they allow investors to make check or electronic debit purchases free of charge.
Some companies, like Johnson & Johnson (NYSE:JNJ), provide a manner for you to invest for free. Johnson & Johnson charges no set-up fee, and they allow you to invest for free if you make monthly contributions by check. However, if you make a contribution by recurring debit, the cost is $1.00 per transaction.
And some companies have such a nominal fee that they are effectively free. Take Clorox (NYSE:CLX) for example. The company charges $15 to setup the account. From there, all electronic purchases cost $0.03 per share to process. Because Clorox currently trades around $74, the cost is about one dollar for every $2,400 that you invest. Considering that you could pay for a lifetime's worth of Clorox's processing fees by checking you seat cushions for change once a year, the cost isn't exactly placing too much of a burden on the investor.
If you click here, you will be taken to a list of every company that offers a DRIP Program. By clicking on the view section, you can see the terms that come with the purchase. Some are free, some charge $0.03, and some charge a dollar or two.
And, of course, not all companies go through Computershare. Some blue-chips administer their own plans. The most famous plan that allows investors to purchase shares for free via recurring debits is Procter & Gamble (NYSE:PG). To get started investing through them, you can click here.
As is often the case, if something sounds too good to be true, it often is. DRIP Investing does come with two strings attached that I believe are worth mentioning. The first is that investors have no say in determining the purchase price of the stock. If you have a Schwab account, you can set a limit order so that the Coca-Cola (NYSE:KO) stock gets purchased at exactly $36 per share. DRIP Investing does not offer this kind of flexibility. While it varies from plan to plan, a standard DRIP purchase will do something along these lines: deduct money from your account on either the 2nd or 17th of the month (you choose), and then purchase the stock at whatever price it as trading at 12:00 or 4:00 that day (again, it varies by plan). And if you pay by check, the purchasing is done at a certain time. For instance, no matter when you send in your check to purchase Johnson & Johnson stock, the company won't buy the shares until the 7th of the month. For investors that are particular about their purchase price, this kind of thing may completely deter them from DRIP investing.
The other thing worth mentioning is that, although purchasing the stock may be free, selling the stock is not. For instance, you won't be charged a dime for any of the Exxon shares that you buy. But if you want to sell the stock, you will be charged a minimum of a $15 fee plus $0.12 per share. If you're not going to be holding a stock for at least a couple of years, the economics of DRIP investing usually aren't worthwhile.
Nevertheless, these DRIP plans provide investors a compelling way to invest $50 to $100 per month free of charge (or, for those that charge $0.03 per share to process, nearly free of charge) and build positions in high-quality stocks for the long haul. The perfect investor for DRIP investing would be someone who might only have $200 to invest in Dr. Pepper here or there but has the attitude, "I don't care whether I pay $44 or $44.50. I know I want to own Dr. Pepper stock today, next year, and the year after that." These plans are great for allowing investors the opportunity to keep adding as much as they can to a stock free of charge, but they are much less attractive to an investor that might sell the stock quickly or cares deeply about the purchase price of the stock. But for the small investor that wants to own a company for 5+ years, these plans can be tremendously useful.
Disclosure: I am long JNJ, DPS-OLD. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.