DRIP's 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, and in some cases these high fees are ruining the plans offered by great companies.

If you've built up shares in a company by investing small amounts over the years, it's difficult to know what to do when fees are added. For some plans, such as those that cap their cash investment fee at $2.50, the choice is between getting out of the plan or committing to investing larger amounts, such as $250, less frequently. (A $250 invested would limit the fee to 1% of your investment.) This strategy is only marginally acceptable, and only that for the best companies. For plans that charge $5, though, 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).

If you doubt that a $5 fee has a significant impact, read on.

Just as surely as an investment can compound your returns, so can the impact of investment fees lower them. And just as surely as people underestimate the power of compounding, they also underestimate the degree to which fees can rob them of what they deserve—namely, their share of the company's stock. 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%.

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

In a word, YES. Take the stock of a great company like Coca-Cola. Imagine what would have happened if Coca-Cola's transfer agent had adopted a transaction fee of $5 ten years ago, and an investor had been sending in $50 a month...this investment would total $6,000 over the ten-year period. That $5 fee on each investment ($600 over the period), would actually have cost the investor $3,202-or more than half of his or her $6,000 investment! How so? Instead of accumulating 480 shares worth $32,017, the investor 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 attempt to invest less frequently. The hole you dig initially by paying high fees also translates into a loss of time, since it can easily take a full year for each cash investment to recoup the fee. Continuing to invest in such a plan, then, means being perpetually behind even as your company grows in value. Investors need to weigh these negatives against their ultimate goal of building wealth over the long term. 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 plans can easily cost tens of thousands of dollars over the course of your investing life, with the sad result that an investor might be faced with delaying his or her retirement (or other major goal) for many years.

Could high fees mean a less comfortable retirement? The numbers seem to support that view, so 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.