DRIPs that Charge Fees
Avoid fee-driven DRIPs
Most DRIPs charge little or nothing to buy more stock. But there are also many fee-laden direct investment plans. 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 take 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.
For some plans, such as those that cap their cash investment fee at $2.50, you could choose to invest a larger sum even if that would cause you to invest less frequently. 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 very large investment amounts on a regualr basis).
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 by investing $50 a month in a great company that charges 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 large amounts less frequently).
If a high-fee plan can cost thousands of dollars for just one company, consider the impact of fees on your 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. A list of DRIPS with no fees is available at this site to subscribers. Please log in for access.
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The Moneypaper’s Guide to Direct Investment Plans marks companies that do not charge fees with a ♥ in its listing of companies. Click here to order The Guide to Direct Investment Plans.