DRIPs and Fees

Avoid fee-driven DRIPs

Most DRIPs charge little or nothing to buy more stock. But fee-laden direct investment plans seem to be popping up every day. Some plans cap their fees at $2.50. This may not sound like much, but if you were to invest $25 a month, the fee would gobble up 10% of your investment. At a $250 investment, the $2.50 would represent a still hefty 1%. It is important that you take fees into consideration when you make your regular investments. There's a handy search function that you can use to find out which companies charge fees, and the amounts. The Moneypaper’s Guide to Direct Investment Plans marks companies that do not offer fees with a in its listing of companies.

For some plans, such as those that cap their cash investment fee at $2.50, you could choose to invest a larger sum less frequently ($250 invested would limit the fee to 1% of your investment). That's still steep so this strategy may only be worthwhile for the very best companies. For plans that charge $5, the fee may be too much to bear. This is not intended to discourage you from investing directly through company-sponsored plans, only to avoid plans that have fees (unless you can commit to larger investment amounts).

Can a relatively small fee have a significant impact on your investment results? ?

In a word, YES! Just as people underestimate the power of compounding, they also underestimate the degree to which fees can rob them of the return they deserve. The simplest illustration is to analyze the effect of a $5 investment fee. If you invest $50, you immediately lose over 10% of your investment. For you to recoup your loss, your remaining $45 would have to grow more than 11%.

What would have happened if, ten years ago, you had started investing $50 a month in a great company with a $5 investing fee. After ten years, you would have invested a total $6,000. That $5 fee on each investment ($600 over the period), would actually have cost you $3,202-or more than half your investment! How so? Assuming a 10% growth rate for the company, instead of accumulating 480 shares worth $32,017, you would have amassed fewer than 432 shares worth $28,815.

The bigger picture

As we've demonstrated, the true cost of a high-fee DRIP can be many times the fee itself, owing to lost appreciation, diminished dividends, and the exposure to pricing risk if you were to invest less frequently. If a high-fee plan can cost thousands of dollars for just one company, consider the impact on an entire portfolio! Realistically, investing in several of these DRIPs can easily cost tens of thousands of dollars over the course of your investing life.

It makes sense to minimize the use of high-fee DRIPs. Ask yourself whether a company (whose plan adopts such fees) is really that much better than its competitors...and keep in mind that it has to be far better in order to justify the cost. You can find a list of DRIPS with no fees at this site.