DRIPs – Dividend Reinvestment Plans

About 5 years or so ago, I held a couple of DRIPs outside of a brokerage account. I went through the whole process:

1. Bought 1 share of Johnson and Johnson and 5 shares of Pepsi to get started. The number of initial shares that are required is dependent on the company. A good place to see how many shares that an investor needs to start a DRIP can be seen here.
2. Transferred the shares from street-name into my own name. When you hold shares through a broker, more often than not the shares are registered as street-name – registered in the broker’s name (i.e. Etrade). In order to participate in a DRIP, you must transfer the registered name on the shares to your name. A call to my broker at the time (Action Direct) handled this. There was a form I needed to fill out and send in and they took care of the rest. Oh, and at the time I think it cost about $50 for each company – expensive.
3. Once the shares were in my name, the question of safekeeping of the shares must be managed. The actual share certificates were mailed to me. These were valuable pieces of paper that need to be kept safe, so I decided to put them in my safety deposit box at the bank. Some companies give you the option of storing the share certificates for you.
4. Signed up with the company for the dividend reinvestment plan and stock purchase plan. The dividend reinvestment plan meant that all dividends I earned from this stock were used to purchase more shares. The stock purchase plan, meant that I could send the company money directly and they would invest the money for me. Some companies allow you to purchase shares at a discount to market, which is a pretty good deal.
5. Finished, except for the paperwork!

Keep in mind that both Pepsi and Johnson and Johnson use companies such as Computershare to manage their DRIP investors. Most of my dealings after the shares were transfered to my name were with them (and another company called Equiserve, who Computershare purchased).

There was a lot of paper mailings that I received. I had to be diligent in making sure I filed these and kept them for tax time. It wasn’t too bad, but I had to pay pretty close attention to make sure I kept it all organized and I was able to determine my adjusted-cost basis as a result of my dividend reinvestment.

At the end of the day, I closed both accounts and transferred the money into my CSA account. The main reason was that I preferred to have one company manage my dividend investments for me and the CSA provided that for relatively good fees. Given, I pay more with them than if I did the DRIP myself, but I don’t mind paying for the convenience.

Some good links for more info on DRIPs include: The DRIP Investing Resource Center, Dividend Based Investing, and Dividend Growth. Let me know your experience with DRIPs and how you managed them.

Technorati : DRIPs, Dividend Reinvestment Plans