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Are Dividend-Reinvestment Plans Risky?

Question: How risky are dividend-reinvestment plans? Are they an easy way to start investing on my own, outside of my 401(k)?

– Jacob Shaw, Duluth, Minn.

Answer: Nothing’s risk-free, but advocates of DRIPs—which let you invest directly in individual companies without a broker—like that the plans encourage disciplined, long-term investing. (More than 900 U.S. firms currently offer them.) Designed to automatically reinvest dividends back into a firm’s stock, DRIPs help reduce the hazards—and heartburn—of market volatility, because you buy more shares when the price is low and fewer when it’s high. One cautionary note, says Michael Kalscheur, a senior financial consultant with Castle Wealth Advisors in Indianapolis: Such continual reinvesting can lead to overconcentration in a single stock. Also, the DIY nature of these plans can mean a drip, drip, drip of paperwork for those who invest in several stocks.

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    • Randian, maybe others will take up the slack. One way geevrnmont can look good is after raising taxes, imposing fines, and taking control of health care, it can effectively reduce the 130,000 pages of health care regulations to reduce costs.

    • I abandoned the so called DRIP plans after my brokerage firm offered free dividend reinvestment on ANY stock position I held. Many brokerages offer this service now . Virtually any stock paying dividends can be utilized in this way. One perk from the new IRS rules ensures the brokerage firm reports your cost basis information . This eliminates this record keeping headache if you are a long term investor.The only advantage of the DRIP is to allow an investor to start with a small initial investment and dollar cost average the individual stock over time . The fees for this service range from very reasonable to outrageous on a percentage basis.

    • I too have been using DRIPS. I started back in the late 70′s. I am within 3 years of retiring and I can say that it has been the best money managing that I ever thought that I could do. Utilizing the auto debit feature of my bank account where purchases were made automatically were wonderful. It ensured that you saved to yourself first, thereby ensuring that you lived beneath your means and saved. This is something that is lost in our society. I have a nice supplemental retirement account that I never would have had if it were not for drips. The best thing is this… I never ever missed the money taken out of my accounts for auto purchases! By not seeing it or actually doing anything, it was out of sight and out of mind. I never tried to do what is mentioned on many investing shows. I stuck with the secure stocks, like utilities and large caps. My best performer is actually a stock that gives you a 5% discount on reinvested dividends. I really love that free money. Over time, the “magic of compounded interest” really comes into play.
      How to Drip?
      1. Become a habitual saver. Save until you feel like you cheat yourself if you don’t save.
      2. With your savings in the back and knowing that you really don’t need it to live on, invest it in something safe that will increase the interest rate of return.
      3. Enjoy those dividends! But, reinvest these dividends until you feel the need to diversify.
      4. Stay disciplined.
      Enjoy!!

    • I’ve accumulated about a dozen DRIP’s during the 1990′s when commissions were higher. I continue to reinvest dividends but no longer make optional cash purchases. I view my DRIP holdings as a paid-up life insurance plan for my wife. I’ve been generally happy with the returns in these plans. There are several bad features including record keeping & tax reporting (when selling any shares). Another bad feature I hit was with a small 100 shr holding in WaMu when the housing market collapsed. As soon as BK was announced, the administrator BNY Mellon absolutely refused to sell my shares (just so I could book a legitimate tax loss write-off). The experience was really bad and they finally let the sale go thru after if fell to like 13 cents/shr. I would have not been under any restrictions if these shares were held in a brokerage account. I’d stay away from any plans run by BNY Mellon cause my experience dealing with them was bad.

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