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Dividend Reinvestment
Plans (DRIPs) are plans sponsored by companies in which the
individual investor can purchase stocks without the services or fees
of a broker. The plans are generally offered only by large,
well known companies. You may recognize some of these
names: AT&T, Dow Chemical Co., Exxon, Intel, PepsiCo,
Volvo, and Wendy's International.
For as little as $25 to
$50 you can begin investing in some of the same high quality stocks
that you hear about on the nightly news, or read about in the
paper. So how do you start? You can contact some
companies directly and find out how to set up an account. Many
companies are now offering DRIPs directly online.
Better
yet, here's how I started. Pick up a copy of the National
Association of Investors Corporation (NAIC) magazine Better
Investing (www.better-investing.org).
For a small set-up fee of $7 per stock and an annual
subscription and membership fee of $39, you're ready to begin.
To allow for price fluctuations, you should also include $10 more
than the price of the stock on the day you send in your check.
After you purchase one share, you can generally set up an automatic
withdrawal or make regular deposits into your account.
Again, the good news is there are
no brokerage fees. Normally, purchasing stocks must be done
through a broker. The broker makes money off of each transaction
(buy or sell). These fees are roughly $7 to $25 for
discount brokers and over $50 for full-service brokers.
What's the down side of
DRIPs? Not much, but there are a few things to remember.
Dividends are taxable. You will be required to pay taxes
on the money that you make, but not on the stock appreciation until
you sell shares. DRIPs are not offered by all companies.
If
you are looking for smaller, more aggressive growth companies, you will need to open a brokerage account.
When you decide to set
up a DRIP account or purchase more shares in an existing account,
you will not be able to choose the day and time of your
purchase. Your purchase will be made on a schedule set up by
the company or the company's trustee. I have found that rather
than being a problem, this forces me to avoid timing the market and
put my faith in the companies that I have selected.
For more information on
DRIPs, read Charles Carson's book Buying Stocks Without a Broker. You can also check out these
links:
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