Today's Progress

Part 1
Over the weekend I began reading 'The Dhandho Investor: The Low - Risk Value Method to High Returns' by Mohnish Pabrai. Mr. Pabrai is the managing partner of Pabrai Investment Funds. Since it's inception in 1999 the fund has returned an average of 29% annually. He is a value investing guru and considers Warren Buffet and Benjamin Graham as his mentors. You can read more about the book at Amazon if you click the picture of the book below. I had read some good reviews about the book and since I consider myself to be a value investor, I decided to pick up the book for a read. I have made it through the first several chapters and am certainly enjoying the book so far. In one of the chapter he quotes Warren Buffet. "Be fearful when others are greedy and greedy only when others are fearful" I couldn't agree more with the Oracle. I can personally relate to his thoughts. There are times I have been greedy when others in the market have been greedy and I have been burned. There are times when others are fearful and I have watched from the sidelines (enough examples here with Research in Motion (RIMM), Merck (MRCK), Corning (GLW), etc).

Is this the time to be greedy? What do you think? I think it is time to get started, time to get all of your ducks (moola) in a row. The market has corrected itself by about ~ 10%. There probably will be some more correction but I think it is time to get prepared to make those bargain bin purchases.

Part 2
One of those bargain bin stocks I have been tracking for the past several months is Limited Brands (LTD) (Google Yahoo Earnings Chart) Why Limited? Who does not know Limited? Okay, maybe some of you have not heard of them. If you haven’t heard of Limited, I am sure you have heard of Victoria Secret or maybe walked past a Bath and Body Works. Limited sells women's and men's apparel, lingerie, beauty and personal care products through retail stores, online, and catalog. The Company recorded sales of $11 billion in 2006 and currently has a 2.67% dividend yield. It certainly has had its share of troubles, like most other retailers, but some of the recent developments have made me optimistic about its future. Limited is certainly doing everything it can (in my opinion these changes are a catalyst for turnaround) to become leaner and focus on a smaller subset of brands. Limited has divested it's majority stake in both Limited and Express brands. It has also announced and initiated a $1 billion stock repurchase program. All in all, I believe LTD has the potential to show a healthy growth in the next several years.

So, I took the plunge. I logged into http://www.stockbny.com/ and opened an account for The Limited Brands. The minimum initial investment amount to open an account for LTD is $200 with an initial fee of $10. I was able to sign up for direct debit from my checking account. I also signed up for the Automatic Dividend Reinvestment option (free) and also signed up for Monthly Purchase Plan ($100 each month) for no fee.

It will take a few days for the direct debit of the initial amount and a few more days for BNY to make the stock purchase. I can now move on to tracking other DSP plans to invest into.

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 Beginnersinvest.com 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.

Where to purchase direct stock plans from?

Let me begin by listing some of the stock transfer agencies that administer and manage these direct stock purchase plans. In general these companies offer the following types of plans:

1. Direct Stock Purchase Plan (DSP or DSPP) with a minimum initial investment in '$$' and an additional investment option to purchase additional shares on an ongoing basis
2. Direct Stock Purchase Plan (DSP or DSPP) with a minimum initial investment in 'number of shares' and an additional investment option to purchase additional shares on an ongoing basis
3. Dividend Reinvestment Plan, popularly referred to as a DRIP, to participate in dividend reinvestment and the option to purchase additional shares through ongoing investment.
4. Dividend Reinvestment Plan (DRIP) exclusively to reinvest dividends only.

American Stock Transfer and Trust Company (http://www.amstock.com/)
Has hundreds of companies listed with initial minimum investment ranging from $25 to $1250. Some plans require ownership of 1 share. Clicking on this link, http://www.amstock.com/investpower/new_plandet2.asp?num=0, will take you directly to the page that lists all of the participating plans.
Pros:
Allows sorting of all plans by minimum investment amount or plan type
Cons:
Does not allow to sort or search plans by associated fees. For e.g. one cannot search for plans with no purchase or transaction fee.

Computershare (http://www.computershare.com/)
Also manages DSP & DRIP for Equiserve (http://www.equiserve.com/). Equiserve was acquired by Computershare in 2006 and all services have been rolled over to Computershare. Clicking on this link, https://www-us.computershare.com/Investor/Plans/PlansList.asp, will take you to the main investment plan page.
Pros:
1) Has a neat search tool to find plans by Company Name, Ticker Symbol, DSPP, DRIP, No Purchase Fee, Minimum Initial Investment, etc
2) Provides a quick snapshot page for each plan. For e.g. here is the snapshot page for the iStar Financial Inc. (SFI) plan.

The Bank of New York (BNY) Stock Transfer (https://www.stockbny.com/)
Similar to the previous two transfer agents, the BNY Stock Transfer also offers DSP/DSPP & DRIP plans. Clicking on the following link, https://www.stockbny.com/UI/Resources.aspx, will take you to the list of company plans offered by BNY. The list identifies whether the plan is a DSPP or a DRIP. The list is quite vast and sorting/searching/narrowing the list is not an option.
Pros:
1) Largest number of plans being offered by a transfer agent, including non-US companies
2) Completing an application online is an option for some of the companies
Cons:
1) Finding a company to match your style is like finding a needle in a haystack.
2) Narrowing the list to only DSPP or by investment amount or purchase fees is not an option. The only available sort option to limit the list to US or non-US companies. The company list from the above link does not lead you to an online application.
3) There is a separate company list view (https://www.stockbny.com/UI/Enrollment.aspx) which lists the initial minimum investment amount and also provides the link to completing an online application, however, this view does not identify the plan as a DSPP or a DRIP.
4) To surmise, there is no comprehensive view that lists the company, identifies it as a DSPP/DRIP, includes the initial minimum investment and also provides a direct link to an online application. You have to utilize the two views to help oneself through the process.

Mellon Investor Services (https://www.melloninvestor.com/)
Similar to all of the above transfer agents, Mellon offers both DSPP & DRIP plans. Click this link, https://vault.melloninvestor.com/jsp/enroll/Search.jsp, to connect to the Invest Direct Search. On this page you can then find a company by Name, Ticker Symbol or Industry Name. Alternately, you can choose the ALL link/option which will take you to the complete list of companies offered by Mellon. On the ALL company list view you have further options to narrow the list by one of many options.
Pros:
1) Presentation of the information is user friendly
2) Several search/sort options available. I would recommend accessing the ALL company list and then using the various search options to narrow the list to meet your specific needs

Direct Stock Purchase

The purpose of this blog is to disseminate information on direct stock purchase plans offered by various companies. Typically, these are offered either directly by the company or via a stock transfer agent . Stocks can be bought directly, either for free (without any brokerage fees) or a small fee (usually $1 to $3). Some plans require you to own at least one share while many do not require you to own a share to begin investing. Typically, here is how the process works:

1. Contact company or stock transfer agent via their website
2. Open an account (individual, joint, trust, etc) for no fee or a small fee ($10 to $20) either online or via a completed application form
3. Meet initial minimum investment amount ($0 to $1000)
4. Purchase additional shares periodically, via an automated checking account debit plan or a one time payment
5. You can sell all or some shares for a flat fee ($10 to $15) and a brokerage fee (pennies per share).

I have found these plans to be well suited for my investment philosophy, which I'll call 'Slow and Steady". It is best suited for someone with a long term timeline and investing for a college fund or a retirement fund. It is not suited for someone with a shorter timeline.

Since 2001, which is when I first came across these plans and invested my first buck, I have invested in the following companies:

1. Aqua America (still own) (Google Yahoo Earnings Chart)
   
2. Caterpillar (still own) (Google Yahoo Earnings Chart)
   
3. Duke Energy (still own) (Google Yahoo Earnings Chart)
   
4. EquityOffice Properties (sold out 2006)
5. Exxon Mobil (sold out 2006) (Google Yahoo Earnings Chart)
   
6. Home Depot (sold out 2006) (Google Yahoo Earnings Chart)
   
7. Paychex (still own) (Google Yahoo Earnings Chart)
   
8. Pfizer (still own) (Google Yahoo Earnings Chart)
   
9. Schnitzer Steel (sold out 2007) (Google Yahoo Earnings Chart)
   
10. Sonoco (sold out 2007) (Google Yahoo Earnings Chart)
    
11. iStar Financial (sold out 2006) (Google Yahoo Earnings Chart)
    

You may be wondering why on one hand I would say that these plans are best suited for a long term timeline and on the other hand sell out on my stocks barely 5 years into the plan. We moved to California in 2005 and bought a house in early 2006 and needed much money for a down payment. I chose to sell out on some of the stocks. Why did I chose to sell those specific stocks and not others? I had various reasons, which I will delve into later.

For now, hopefully I have caught your attention and made you consider Direct Stock Purchase plans as an option to invest into your future, irrespective of what your goal is.

Adios for now. More real soon.