Some Q & A

Over the last couple of weeks I have received a few questions regarding DSP/DRIP plans. While answering these questions I realized that I had the same questions a few years ago while I was learning more about these plans and discovering the various transfer agents that offer these plans. I thought these questions would be helpful to anyone out there interested in DSP/DRIP plans.

Anyway, here goes:

Q: I just read your post on purchasing DRIP stocks and was wondering what you could tell me about how much your monthly investments are costing you in terms of commission or other costs. I'm 18 years old and a startup value investor who just wants to find a place better than a bank account to stick some of my money.

A: I currently hold 5 DSP/DRIP plans, Duke Energy, Paychex, Pfizer, Aqua America & Caterpillar. I allocate $500 across these 5 plans, approx $100 per stock. Among these five, I only pay a commission on Caterpillar which is $1 every month. The remaining 4, all excellent stocks, do not charge me anything for my monthly purchases. I have set up automatic debit from my checking account so the amount of effort on my part is pretty much none. Another example is Sonoco (SON), I bought into the plan in July 2005 and had to close out in May of this year. Over the 22 months, that I held the stock, I bought additional shares every month for no fee. I paid a $10 initial set up fee and no sale fee (none whatsoever). My total return for that period was 35% before taxes.

In some cases my total costs have been higher, for e.g. I held Exxon for over 5 years selling on two occasions (sold a portion in 2006 and the remaining in 2007). I paid no fee for monthly purchases for the 5 year period and paid $15 for my sale in 2006 and another $16 in 2007. A total of $31 is still a great deal for being able to buy shares monthly for over 5 years. I started purchasing Exxon when the share prices were in the 30s, 40s, 50s and eventually sold in the 60s and 70s. You can see how well dollar cost averaging works with DSP/DRIP.

Q: How has PFE done for you over the years and do you have any other recommendations on DRIP stocks? Obviously dollar cost averaging smaller stocks would be a whole lot cheaper for me than the ETF I am using right now.

A: PFE has been the worst of my performers. My return has been 2%, which is horrible. At times it has been frustrating holding this stock but I am a firm believer in buy and hold and more importantly I believe that this stock will return to it's glory days. My return is so low because I purchased PFE in 2001/2002 when the stock price was in the low 40s and high 30's. Since then the price has settled in the mid 20s. I would recommend anyone wanting to get in now, to do so without a second thought. For no initial set up fee and no ongoing purchase fee it's hard to beat an investment like PFE, with a 4.8% dividend yield.

My investments in Paychex, Duke, and Aqua America have fared much better, 22%, 45% & 18% respectively. I recently began investing in Caterpillar when the price dipped down to the high 50s/low 60s (in March). I started my investment in March and have been investing monthly and my return so far has been around 7%.

I have listed some other DSP stocks in my wish list on my blog if you would like to check them out. Omnova (OMN) in particular, looks very promising.

The next 2 questions address what I would call "two slightly difficult/atypical aspects of DSP/DRIP plans".

Q: After reading through your email and looking through your blog, I searched for a DSP/DRIP plan for companies I had already been interested in following, namely Johnson and Johnson (JNJ). As I found Johnson and Johnson has a plan very similar to the companies you mentioned. However, I do have a few questions about the specifics of DSP plans. 1. I noticed in the JNJ plan brochure that to be eligible for the plan I have to currently own the stock. So I am assuming that my first purchase in DSP plans will have to be through my broker, correct?
"Shareholders of Johnson & Johnson common stock holding stock certificates or shares in direct registration book-entry form are automatically eligible to participate in the Program.If you hold your shares with a broker, you can participate by instructing your broker to transfer the shares into your name. Program services are available to any shareholder of record, even if you own only one share."

A: Yes, you will have to go through a broker and have the broker transfer the share into your name. Now, that can be expensive/increase your commission fee since in addition to paying the typical commission to purchase the stock you will also incur an additional fee to transfer the share to your name. I believe the transfer fee is probably between $30 to $60 depending on the broker. It is also fairly time consuming (3-5 weeks). For both of these reasons I haven't pursued plans that require one to have a single share. I have always opted for ones that required an initial investment amount rather a single share. It's also been a few years since I have reviewed DSP plans requiring a single share, it may be worth a second look now.

One other option is to buy a single share from a place like Oneshare. I had read on that the share you purchase from oneshare allows you to subsequently participate in DSP/DRIP programs. I checked out JNJ for you on Oneshare and turns out it will be $100 to purchase a stock and have it transferred to you. A little pricey, what do you think? Maybe the brokerage is a better option.

Q: I also am wondering how taxes will work towards these DSP plans. Is it any different from regular stock tax forms in using the 1099-b form? I haven't even filled out a 1099-b for my regular stocks before, so I was wondering if I would be in for anything strange come tax time.

A: Taxes will be additional work. I can imagine it would be more work if you sell after having held on to the shares for a long time, say 15-20 years. On a yearly basis, if you haven't sold any shares then the only tax document you will receive is the 1099-DIV for the dividends. When you do sell your shares you will need to separate your gains into short and long term. Short term is any shares you purchased (on a monthly basis) starting less than a year ago and long term is any you purchased more than a year ago.

Tax year 2006 was the first time I had to do this. I had to create a spreadsheet to make it easier for me. Creating the spreadsheet took some time but once I had it working, the actual determination of gains wasn't that very time consuming. I will try to clean up the spreadsheet and put it on my blog in the next few months. At the end of the year I download the entire year's transactions to a spreadsheet so I have all of this data available to me at tax time.