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Getting Started In Investing
Are you ready to open your pathway to financial independence? Well you should be. The sooner the better. But, how do you get started? There is so much to know about investing and the truth is it will take a lot of training and guidance in order...
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How To Better Handle Your Mail
Letters, magazines, bills, flyers, what to do with them all. There should be only two responses to every piece of mail or e-mail, do something with it, or toss it! The best way, as always, to deal with it all is in an organized fashion. ...
Networking Tips - Getting An 800 Number
Another way to network is by using an 800 number and establishing a network of experts to refer your clients/customers to. An 800 number provides a way for your customers to reach you. You can answer information needs, resolve problems and...
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15 Common Investing Pitfalls
We touched briefly about common investing pitfalls here. Here is a more comprehensive list. Some of it may happen to the more experienced investors as well. This serves as a guide for Novice Investors:
Investing with debt. You should not invest...
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Dividend Reinvestment Plans: Investing On Automatic Pilot
If you're like many investors who squander those small dividend checks from your stock portfolio, a Dividend Reinvestment Plan (DRP) might be just what you need. Just as its name implies, a Dividend Reinvestment Plan allows you to reinvest some or all of those dividends into more stock of the issuing company. Unlike purchases made through traditional means, partial or fractional shares, as well as whole shares, are available.
Technically, there are two types of DRPs. The first type involves buying shares at the market through an outside trustee. Although the company may subsidize the transaction costs, buying shares at a discount is not allowed.
The second type allows you to purchase directly from the issuing company, which may provide a discount from the market price. This is a distinct advantage over buying from an outside trustee.
Besides giving dividends a better purpose than sitting in your pocket or in a brokerage cash account, a DRP may offer other advantages as well. By buying on a regular basis, you are “dollar cost averaging” your purchases, an investment strategy designed to reduce volatility. Dollar cost averaging involves continuous investment in securities regardless of fluctuation in the price. Of course you should consider your ability to continue purchasing through periods of low price levels. This type of plan does not ensure a profit or protect against loss.
Secondly, many companies offer added options with their DRPs, including purchasing stock at low minimums and sometimes even offering shares at a discount (often 3-5%) off current market prices.
From a tax standpoint, you are subject to income taxes on the value of the dividends whether you reinvest them or not. Your tax basis for all your shares including the reinvested dividends is the amount paid for the original shares plus the dividends, minus any costs deducted from your dividends as a service charge as part of the DRP.
Keeping good records is a necessity, especially if you plan to continue participating in a
DRP over a number of years. Without the records, it may become very difficult to track all your purchases. A little bit of effort now can save you big headaches later on.
Usually, you will receive a quarterly statement outlining your DRP account. Among other things, these quarterly statements will detail your on-going investments, how many shares are held by the program, how many shares are held be you, and the value of all your shares.
Not all companies offer DRP's but, for a list of one's that do, there are many web sites dedicated to these plans. These internet sites not only have a full list of companies with DRPs, they also offers online enrollment services. For securities held in a brokerage or wrap account, check with your brokerage firm to determine if they have the means to enroll you. If all else fails, try either the company itself or its transfer agent.
Although it is easy to see the advantages of DRP programs to the investor, we should not overlook the benefits to the issuing company. Besides helping to stabilize market prices, a DRP is a relatively efficient way to raise capital and, because companies only “promise” to continue these programs in the future, the issuing company controls when and how much capital will be raised.
Over 1,000 companies currently offer some type of Dividend Reinvestment Plan and, with a little research, you should be able to get on the path of “automatic pilot” investing for the future.
Copyright 2005. LivingTrustNetwork, LLC. All rights reserved.
About the Author: Glenn (“Chip”) Dahlke, a senior contributor to the Living Trust Network (http://www.livingtrustnetwork.com), has 28 years in the investment business. He is a Registered Representative of Linsco/Private Ledger and a principal with Dahlke Financial Group.
Source: www.isnare.com
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