Personal Finance: Direct investment plans offer a great way to learn about investing

Personal Finance: Direct investment plans offer a great way to learn about investing

May 28th, 2014 by Chris Hopkins in Business Diary

Chris Hopkins

Chris Hopkins

Photo by Patrick Smith /Times Free Press.

Investors today are fortunate to have access to a variety of low-cost conduits to the stock market. In fact, the array of discount brokers, mutual funds and internet trading platforms provide so much choice that some less experienced investors might easily feel overwhelmed.

One easy, productive and educational way for beginners to get their feet wet is to enroll in a direct investment program. Offered by hundreds of great US companies, direct investment plans or DIPs allow shareholders to purchase stock directly from the issuing company, and more importantly to automatically reinvest quarterly dividends in more company stock. For this reason such plans are often called Direct Reinvestment plans or DRIPs. Thanks to the power of regular investment and compounding, the results over time can be dramatic.

Details vary widely, but hundreds of companies offer direct reinvestment plans. The starting point is typically the acquisition of at least one share of the company's stock directly from the firm, through a broker or the company's transfer agent, or from one of several businesses that specialize in helping new investors get started with DRIP investing.

Once you own one share or more, the fun begins. As a shareholder, you will receive regular updates including the annual report of the company's financial health and operating results. If you live near enough or wish to travel, you are also entitled to attend the annual shareholders' meeting.

Most importantly, by setting up a regularly scheduled payment plan either monthly or quarterly, you can watch your holdings grow systematically over time as you purchase additional stock and as your growing dividend payments buy more and more shares each quarter.

Many companies with DRIP programs actually waive any fees or commissions or add only very modest charges to cover expenses, so virtually all of your money goes right to work. And some plans actually offer participants the right to invest at a discount to the current market value of the shares.

Direct investment programs trace their origin to the early 20th century, primarily as a means of encouraging employees to obtain a stake in the companies for which they worked. Ultimately, eligibility was expanded to include any existing shareholder. These plans grew in popularity through 1980s and 1990s, but are still relatively unknown to many individual investors.

Getting started requires selecting a company in which you want to invest, and obtaining your first share of stock. Resources abound on the internet, but one good way to identify potential candidates is to browse the websites of the various transfer agents that handle the details for the issuing companies. Wells Fargo Shareowner Services, American Stock Transfer, Bank of New York and Computershares are just a few of the many agents that can facilitate your initial purchase in the stock of the companies they represent.

You can also go directly to the Investor Relations page on your favorite company's website to investigate whether they offer direct investing. Many do; in fact 27 of the 30 Dow Jones Industrials maintain DIP or DRIP plans, and in some cases you may be able to purchase your first share directly from them as well.

Successful investing over a lifetime still requires diversification, or spreading your capital effectively over a number of companies, sectors and asset classes. But for its educational value as well as cost effectiveness, consider dedicating a portion to a few long-term DRIP plans with quality companies and watch your money grow with the magic of time.

Christopher A. Hopkins, CFA, is a vice president for Barnett & Co. Advisors.