Seeking Alpha

Do DRIPs Make Sense Any More

by: nstollon
Deep Value, special situations, growth at reasonable price, contrarian

Recent reductions in discount broker fees make most DRIP services obsolete.

DRIPs have become the more expensive way for individuals to buy stock.

Things to consider if you are moving around your portfolio.

The last quarter has marked one of the most significant changes in discount brokerages, maybe since the invention of the discount broker concept itself. All of the major discount brokers I have used (Schwab, TD Ameritrade, E-Trade, Fidelity) have gone to a no-fees model. So, in essence, the entire public equities market has become a no-overhead world for investors.

For someone like me, who has been a long-time investor in various DRIP programs such as Computershare, AST, and Shareholder services, this really changes my world view on investing. For many years, the DRIP programs provided a low cost means to invest a few hundred dollars at a time, with either zero or a $2-3 added fee. While sometimes still high on a percentage basis, it beat the $5+ commissions charged by a broker. As times pass, these no to low fee investments inched up to $5 or higher for new investments and even charging fees for reinvesting the dividends. At the same time, discount brokers dropped their fees to under $5, leaving me scratching my head on how DRIP plans made sense anymore.

So, recent years have seen me migrating the now not-inconsiderable assets in these DRIP plans to brokerages, helped in no small part by programs at the brokerages to pay incentives on new assets.

How long this zero-fee brokerage environment will last is a question. Just as banks have figured out how to replace lost fee revenue with new and different types of fees, I expect that the brokerages will also be looking at how to replace some of their fee revenue. Sadly, like many of the banking fees, I expect that new fees will fall most strongly on low balance accounts. We shall see how this prediction plays out in another article in the future.

In the interim, I do have 3 suggestions for investors migrating from DRIP plans to discount brokerages.'

1. Keep in mind that DRIP plans typically charge an exit fee of $15 or more to close out a plan. Also, keep in mind that most brokerages only accept the transfer of whole shares. In the best of worlds, it is best to try to structure accounts to have a very small fractional share, which may be kept in the DRIP plan to avoid a closing fee. At some point, the plan may close out the account, but as long as the amount remaining is worth under $15, it will be a new gain to you. Keep in mind that this can get tricky for high price per share stocks.

2. If you qualify for an incentive, work with a client representative at the brokerage to get transfers done and make sure you claim any incentives the broker is offering. Typically, tying the incentive to a transfer requires some approvals from the broker.

3. Keep all your DRIP plan paperwork, especially as it relates to cost basis. My experience is that brokerages are not great at tracking cost basis. I have more than a few accounts where the cost basis is near zero as result of a transfer.

So, as a parting comment, are there any reasons to hold stocks in a DRIP rather than thru a broker. I am hard pressed to find a reason for using a DRIP account these days. Perhaps, the only consideration is that brokerage stocks are held in a brokerage name vs. DRIP stocks being held in individual name. It is not clear to me if there are legal or other considerations to this or if it may be important for certain circumstances.

On a personal level, having stocks in a DRIP account has been a good teaching tool for getting my kids to appreciate stocks. Being able to share the mailed DRIP statement (how much mail do kids get these days) showing DRIP'd dollars getting converted into shares of Disney or Caterpillar stock was probably more compelling than seeing that same transaction on the brokerage website. Was it worth the extra fees? Those same kids are now investing adults, so maybe so.

All the above is my personal opinion, and I am sharing analysis done for my own personal use. In talking about the future, you are almost always likely to get the best parts wrong. That is part of what makes it interesting.

Disclosure: I am/we are long DIS, CAT. 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.