Are Company Sponsored DRIP Plans Viable

08 Oct 2016 12:38

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There was a time when company sponsored DRIP and Direct Stock Purchase (DSP) plans were the best low cost solution for small investors. But, in today’s low cost trading world it begs the question if these company sponsored plans still have value to the small investor.

When I first started investing in the 1980’s a discount brokerage house would charge commissions that ranged from $35 to $50 a trade and they did not have their own internal DRIP program. But company sponsored DRIP & DSP programs offered a huge discount as they typically did not charge a fee to buy stock and dividends were reinvested for free or at a nominal fee. The only commission charged was when you sold and the commission was around $25 per trade.

By the late 1990’s the internet began to explode. New online discount brokers like E*Trade and Ameritrade began to appear and disrupt the brokerage world by offering commissions below $10 per trade. Some new companies, such as Scottrade, pushed the envelope even further by offering $7 trades. As the popularity of online trading soared, brokerages expanded their services by offering free DRIP programs. By the early to mid-2000’s all of the traditional discount brokerages were online and offering low commission trades and free DRIP programs. The low cost trades and free DRIP programs offered by brokerages today appear to make company sponsored DRIP & DSP plans irrelevant and more expensive but in certain circumstances they still make for a viable alternative to investing.

If you are a dividend income investor, whose income is dependent on dividends, a DRIP is a viable alternative thanks to its flexibility in dividend payments that online brokerages do not offer. With discount brokerage a dividend re-investment is all or nothing, if AT&T pays you a dividend of $50 it reinvests the entire $50 back into full and fractional shares. But, with a company sponsored plan you can direct how many shares you wish to receive in cash and how many to reinvest. This scenario provides income investors with not just an income stream but also the potential for income growth.

Say you own 200 shares of AT&T (T) who pays a quarterly dividend of $.050 which equates to 200 x 0.5 = $100 quarterly dividend payment. In a company sponsored DRIP I can designate 80 shares to be paid in cash and 20 shares to be reinvested so that splits our quarterly payout to $80 in cash and $20 in new stock. Assuming the reinvested shares after a year acquire 2 new shares then our quarterly payment will increase to $41 and continue to grow every year after that. In 15 years you will return to your original $100 cash payment and every year after that your cash payment will continue to grow. Amazing how a small sacrifice up front provides a better long term solution.

Overall I believe company sponsored plans to be a pain in the ass. They nickel and dime you with small fees and you have to manage all of those individual accounts. I get the same functionality from my brokerage and all the paper work is managed under one account. But, I do see the benefit of the partial reinvestment and may use this approach with a handful of companies when I retire, unless my brokerage offers partial reinvestment in the future.

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