Some people built their fortunes by reinvesting dividends. My
mother was one of them. For example, she parlayed a $2,500
investment in Bristol Myers ( BMY ) into
$65,000 simply by reinvesting dividends intoshares of the company
over some 30 years. Then, when she needed the income, the cash
dividends thrown off by the stock and her other holdings provided
more than enough for her to live.
Many readers of my High-Yield Investing
income advisory do the same thing. That's the power you have
with what Icall Retirement Savings Stocks -- stocks with high,
dependable dividends that rise over time. Many of the best
Retirement Savings Stocks are under the radar. But
when you buy them, hold them, and reinvest the dividends, you wind
up with one of the single most powerful wealth generators you could
That's not to saydividend reinvesting is for everyone or for all
markets. The strategy magnifies your gains when stock prices are
rising but also intensifies your losses when prices are
But if you don't need the income now, then participating in
adividend reinvestment plan (DRIP) or associated direct stock
purchase plan (DSPP) can be a great way to build your nest-egg and
its income-earning potential. These plans let you accumulate shares
without excessive brokerage fees eating into your returns. DRIPs
automatically use some or all of the cash dividends you receive to
buy shares in the company. DSPPs allow you to buy additional shares
direct from a company.
Broker or company DRIP?
Dividend reinvesting is a wealth-building strategy, but as with
any strategy, you need to learn the ropes.
Once you decide that dividend reinvesting is for you, you need to
make a decision: Do you use the broker or company DRIP?
Brokersoffer free dividend reinvestment plans but also charge
acommission each time you buy and sell the stock. Also, brokers
generally don't provide the direct stock purchase plans that
companies make available if you participate in a company-sponsored
The decision of whether to use your broker's DRIP or a company
plan depends, in part, on your investing style. If you invest small
amounts on a regular basis, then a company-sponsored DRIP can help
reduce costs. But if you buy and sell stocks in a large lump sum,
without incurring much in brokerage fees, then your broker's DRIP
gives you more control over the timing and price of your
The decision of whose plan to use also greatly depends on the type
of plan the company offers. Not all company DRIPs are the same, so
you need to read the fine print in theprospectus (which you can get
on the company's website or by phoning the company to request a
copy). Some features in a company-sponsored DRIP and DSPP can make
it worth your while to invest in a company plan even if you do
invest in large lump sums.
For example, below is a summary of electric utility
Integrys Energy's ( TEG ) DRIP
plan, which is one of the best I've found, compared with
AT&T's ( T
Besides share ownership, a lot of other features in a company
DRIP and DSPP can make it worth your while to invest in a specific
company plan -- or not. You can see, for example, how expensive
AT&T's dividend reinvestment plan is compared with Integrys
AT&T's plan is clearly inferior. Once you've made the initial
share purchase, AT&T will charge you $10 to set up your
account, plus a service fee of $0.05 per share. In addition, each
dividend reinvestment will incur a service fee of 5% of the amount
reinvested, up to a maximum of $2.00, plus a transaction fee of
$0.10 per share.
In contrast, Integrys charges no set up fee, no service fees, and
no transactions fees for reinvesting dividends in shares of the
You can sell the shares you've acquired in the AT&T plan, but
you will be charged a sales service fee of $20 for an
intra-daymarket order or $10 for a weekly batch order, plus a
broker commission of $0.10 per share in either case. For Integrys,
there's no sales fee and you'll onlybear the cost of what a broker
charges for selling the shares in the openmarket .
In sum, Integrys provides an attractiveoption to your broker's
dividend reinvestment plan, but AT&T does not. And if you want
to build a position gradually by buying additional shares over and
above what you get from reinvesting dividends quarterly, the
Integrys direct stock investment plan is definitely the way to go.
There are no set up fees, no brokerage commissions, and no other
charges. The minimum purchase is only $25 worth of stock at a
In contrast, you would do just as well to buy AT&T stock from
your broker as you would direct from the company.
The best DRIPs on the market
I found a half dozen companies that, like Integrys, carry 5%
yields and alsooffer attractive no-fee DRIPs. Listed below are
their names and a toll-free number you cancall for additional
Risks to Consider: A good DRIP doesn'tguarantee good stock
returns. It doesn't ensureprofit or protect you from loss any more
than if you invested in the shares outside the plan. Moreover, the
plans are not tax-free. Dividends reinvested in shares of the
company are taxable at the same rate as dividends received in cash.
Capital gains or losses on shares sold within the plan are treated
the same way as shares sold outside the plan.
Action to Take --> Some of the companies on
this list may make better investments than others. The list is just
a starting point for further research. In fact, I've just released
a report, " The 10 Best Retirement Savings Stocks for
2013 ," that tells you more about Retirement
Savings Stocks , including the names and ticker symbols of
my top picks. Go here to learn more.
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