Thursday, September 23, 2010

How to Get Rich Slowly DRIP by DRIP: More Follow Up Investments

Do you want to be “an investor” but don’t have the cash? Are you saving for retirement or a trip around the world – but you can’t see how you’ll reach your goal?

A Dividend ReInvestment Plan account (DRIP) – might be the solution.

The Main Thing
The main thing you need to know about DRIP accounts is you can start one for $250.00 or less and make follow up investments as low as $10 to $100.

Follow Up Investment Frequency
After you establish a DRIP you can, if you choose, add money every month or whenever you want – including never again.

When I contribute money to my DRIP it’s held until the next monthly purchase. Computershare, my DRIP administrator, seems to execute purchases between the 18th and the 22nd of the month – regardless of when you send in the money. If you miss their window they just queue it up for the regular purchase time – next month.

Follow Up Investment Fees
Most companies don’t charge fees or commissions to make follow up purchases. They generally do charge fees if you make your initial purchase thru the DRIP administrator instead of transferring shares from a broker. Remember you are buying stock from the issuing company, not from the DRIP administrator.


The box above, copied from my DRIP account web site, shows my most recent monthly purchase of Hasbro (HAS).

I contributed $25 via a checking account draft that is set up to occur every month. On 9/15/2010, Computershare bought from Hasbro 0.567924 shares of HAS common stock at a market price of $44.020000 per share. On 9/20/2010 the 0.567924 shares of HAS were credited to my DRIP account.

The exact same thing happens when I send money to a DRIP without the benefit of a regular monthly bank draft. I set up a one-time draft in those cases.

Although writing paper checks is an available option I don’t use that method. I just don’t trust that checks will always get where they’re supposed to go in a timely manner.

In my Hasbro DRIP account I buy $25 worth of HAS stock every month. Because the price varies with the market, I buy a different amount of stock each time.

The table above shows the monthly purchases of HAS I’ve made starting with my November 2009 purchase. In every case, I bought $25 worth of HAS. You can see that every month I bought a smaller fractional share beginning with 0.849615 shares and ending with my most recent purchase of 0.567924.

This is a “good news/bad news” situation. I’m buying fewer shares for my $25 because the share price is going up – significantly. Because the stock price is going up, the value of my account is going up too. However, my monthly $25 buys fewer shares.

This Is Real
This really works. I set up my HAS account by transferring shares from my broker. I could’ve bought a single share thru my broker. If I did, my cost structure would’ve looked like this.

In October 2009, the market value of one share of HAS was $29.42. If I’d just opened the brokerage account and didn’t qualify for any commission discounts, the commission on a one share purchase would have been $19.95; so, $49.37 would’ve been my initial startup cost.

$29.42 + $19.95 = $49.37.

I didn’t buy just one share and the commission I paid was lower. The startup cost is hypothetical. But, the chart below shows the reality of my recent experience adjusted for the initial purchase of one share at a maximum commission rate. This is a real life example of what can happen with a DRIP.

Hasbro has did very well in the twelve months shown. My Hasbro DRIP has been open for two years and it’s done even better. Not every stock will do as well. Hasbro may never do as well again. But a DRIP can put you in the stock market at a very low cost.

Remember that DRIP means Dividend ReInvestment Plan. I haven’t yet mentioned dividends. That’s for next time.

Link to Topics in the Special Report - How to Get Rich Slowly DRIP by DRIP

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