Monday, August 5, 1996

A Case Against DRiPs
or
Sometimes Other People Are Right
by MF Runkle

In my last Fribble, I talked about how I used to hate it when people disagree with me. Sure enough, in my last chat I hosted, one of the guests brought out some good arguments against DRiPs. Since I am now very tolerant of those who disagree with me, I only threw a few things against the wall, and gritted my teeth a little. However, this guest was very Foolish, and others should hear his points. So, I am going to lay out his arguments, and relate them to Foolishness in general. You see, we aren't Wise, so we don't expect everyone to follow us blindly. Now, let me put down my chocolate chip cookie and get into the subject of DRiPs.

I always sing the praise of Dividend Reinvestment Plans (DRiPs), which may better be called direct purchase plans. Many companies, such as McDonald's, Coca Cola, and Intel allow you to buy stock directly from them. The idea of buying stock directly from a company doesn't benefit any brokers or others among the Wise, so the possibility isn't publicized much. Many companies even have automatic withdrawal plans, allowing you to make regular monthly investments directly from your bank account, taking advantage of dollar-cost averaging. That way, when the stock price goes up, you buy fewer shares, and when the stock goes down, you buy more.

Some plans, however, aren't exactly free. For example, every month I buy $100 of McDonald's stock in an automatic investment plan. I pay about $1.30 in fees. That is for roughly two shares of stock. Now, if I were going to try to buy $100 worth of stock from a broker each month, I would pay at least $35 in commissions. So, the fees I pay aren't bad for that small an investment. If you make voluntary contributions, however, the fees are pretty steep in this plan. A $100 voluntary contribution to my son's plan costs me over $5.00 in fees. Even for larger amounts of money, the fees in this plan are less of a bargain compared to buying stocks from some brokers. There are many deep discounters that are much cheaper.

Finally, there is the timing issue. Purchases and sales of the stock are usually limited to certain days of the month, or perhaps only quarterly. Buying or selling quickly is impossible. Also, some plans charge for selling the stock. Some plans won't sell the stock for you; they will only transfer the shares to you or your brokerage account. In any case, it probably is more advantageous to move the shares to your brokerage account before selling anyway. Otherwise, you may be unfortunate enough to discover your shares get sold the day Elaine what's-her-name predicts the end of civilization as we know it. Your stock could be sold on the greatest one-day drop of all equity markets in the history of the world. (You'll need some chocolate chip cookies then; I've got some left over.)

Now that I've trashed DRiPs, do I think they are a bad idea? Heck no. I still invest in them, because at my level, they are the best deal around. This relates back to everything in investing. You have to evaluate your own situation, and do your own research. Don't take my word that you need to go into DRiPs, or somebody else's that you shouldn't. Also, don't buy stock simply because someone says it is going to go up. You only need to read a few of the stock boards to find out what happens to people that do this. To be truly Foolish, we need to make our own decisions. Now, where did I put that bag of chocolate chip cookies?

Transmitted: 8/5/96