Thursday, December 28, 2006

Why I Don't Use DRIPs Any More

Much has been written about Dividend Reinvestment Plans (DRIPs) being a great investment tool, especially for those who do not enough fund to buy round lots of stocks. I agree that DRIPs are a great way to get started in investing in stocks because DRIPs allow for small and fractional share purchases. I fully agree with the buy-side benefits of DRIPS.

My issue with DRIPs is on the sell-side and estate-side, specifically, the higher than normal amount of record keeping and paperwork that is needed.

  • Record Keeping Requirements to Sell. DRIPs allow purchasers to buy small round dollar amounts. In addition, the quarterly dividends will be used to purchase shares. In both cases, the purchase results in fractional share purchases and varying share amounts for the same dollar amounts. This isn’t a big issue if you don’t ever plan to sell the shares.

    However, if you plan to sell the shares, you will need to have a detailed record of each purchase. If you make a monthly contribution to a DRIP, you will have 16 purchases to record a year, 12 from regular monthly investments and 4 from quarterly dividend payments. In addition, sales will be made with whole number of shares. Thus, additional calculations to combine the 16 yearly purchases and the reallocate the cost basis to full shares will be needed.

    All this work will typically be needed for fewer than 100 shares of the stock. Compare this to a single purchase and sale of any number of shares from a stockbroker. One only needs to record the single purchase and no additional calculations are needed for the sale. For my one DRIP, I used Excel to summarize purchases over several years and do all the necessary calculations. Even with Excel, the effort was significantly higher than if I had simply made a purchase through a broker.

  • Transferring After Death. While this doesn’t concern one during one’s lifetime, it does have an impact on the executor of one’s estate. For each DRIP, the necessary paperwork will need to be filed. Typically, this includes a death certificate, letter of testamentary, new account forms, transfer of account forms and an instruction letter. Some of the forms will need notarization or Medallion guarantees from a bank. The forms need to be done for each DRIP, e.g. eight DRIP accounts requires eight sets of forms.

    I have also personal experience with the executor element. We just completed all the estate management paperwork with a discount broker. It has taken four calls to the call center and two hours at a branch office to get all the papers and then fill them out. I have already invested a couple hours with the various DRIP call centers, some of which were not very helpful. After getting the forms, we are now in process of filling them out to open new accounts, transfer funds, and close out previous accounts. All necessary, important, AND time consuming.

In today’s world of low commission trades via discount brokers, I think the benefit of DRIPs is much lower. At less than $10 per trade (and as low as $0-$5 per trade), I can make small purchases at discount brokers, similar to those executed in a DRIP. And the record keeping is simplified by being in one account.

For those of you who already have DRIPs and haven't kept all the records, one solution is to donate the shares to a charitable organization and take a tax deduction. Although I did calculate all the purchase prices for my one DRIP, I am disposing of shares through charitable contributions for a triple tax benefit.

Photo Credit:, Paul Anderson

This is not financial or investing advice. Please consult a professional advisor.

Copyright © 2006 Achievement Catalyst, LLC


ISD said...

DRIP accounting for a cost basis is a nightmare...I'm with you!

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