The traditional means of DRiPping is perhaps not the best, but the option should at least be understood.
Choices are good, and if I were in the process of creating a DRiP portfolio then the means I described in the previous article would probably be the direction I would take. That said, it is good to understand one’s choices, so I will explain the original approach I took years ago.
My grandfather worked for AT&T and over the decades, being an employee, he was able to accumulate a large number of shares of the company. Each paycheck some of his money went to the company and was invested in their stock, with the dividends reinvested. Generally speaking, this is the traditional means of participating in a dividend reinvestment program.
For one to be able to participate in a company’s DRiP they must initially be the actual owner of that company’s stock. This is not as straightforward as one might think. Purchasing shares of a company through a broker does not actually mean that one owns those shares – they do not – the shares are owned by the broker for the client. This is called owning shares in street name.
Brokers hold stock in street name for convenience. A lot goes into the transfer of stock from one entity to another, and were the broker required to convert ownership for every trade, the overhead would be time-consuming and costly. Of course, owning stock in street name still gives the owner all of the rights that are afforded to the true holder of the stock.
To be allowed to participate in a dividend reinvestment program one must own a certain number of shares (usually just one) in the company. This means that while one can make a purchase through a broker, they can only be the actual owner of the stock by asking the broker to transfer the stock to them.
This involves the issuance of a stock certificate, and there will probably be a cost associated with this. For instance, looking at the fees listed on eTrade and TD Ameritrade the cost is $500 for the service, which sounds crazy to me, but their business model is one where the customer is expected to do most of the work, so it is something that is discouraged. There was a time when this service was free but that time has probably passed.
Fortunately, there is a less expensive and more convenient way to do this. DirectInvesting.com can make the purchase as well as enroll the customer in the company’s dividend reinvestment program for 1/10th of this cost (less if the company one wishes to purchase happens to be their monthly special). I have used their service in the past and can attest to the convenience of not having to obtain a physical stock certificate, mail it to the company (which should be done with the added cost of using registered mail), and fill out the application form for the program.
Although all of the holdings in my DRiP portfolio were obtained through this traditional route, I cannot think of an advantage I hold over someone who has decided to obtain their shares through a discount broker like TD Ameritrade as outlined in the previous article. Whichever route is taken, making numerous purchases of great companies over a long period of time and having the dividends reinvested will yield great benefits.