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Dividend reinvestment plans.

In their quest for high returns, some investors are willing to take enormous risks with their money. They know that the greater the risk, the greater the potential capital appreciation on their investment. Also, those folks with investments that offer safety of principal have often watched inflation erode the power of their purchasing dollars

However, there is a simple and painless way of enhancing one's dollar value while reducing market risk. Reinvesting dividends or interest payments on a regular basis significantly increases a portfolio's returns.

Dividends are usually cash payments offered by a corporation to its stockholders. The amount--the stockholder's share of profits--is decided by the board of directors and is usually distributed quarterly.

But exactly how does this translate into impressive gains? Rather than take the dividends in cash, you can take the payments and buy additional shares of stocks. In fact, more than 1,000 companies allow investors to use this approach to buy company shares by offering dividend reinvestment plans (DRIPS). While most DRIPS are available to company employees, hundreds of corporations are opening their DRIPS to nonemployees.

"DRIPS are a real empowerment tool to the small investor," says Charles B. Carlson, author of Buying Stocks Without A Broker (McGraw-Hill, New York). The book lists 900 companies in the United States that currently offer DRIPS.

Most financial experts stick to their guns in advising that portfolios should always have some stock investment The beauty in this is that DRIPS are an inexpensive way to invest in solid, blue chip companies.

As Simple As 1,2,3

Another advantage of DRIPS is the convenience. Joining a DRIP is an easy process; all a shareholder needs to do is to complete a form authorizing the company to take out his or her dividends to automatically buy more shares. The company then mails the form to the firm or bank administering the plan.

In addition, DRIPS allow you to sidestep dealing with a stockbroker almost entirely. Generally with DRIPS, you will need a broker to buy your very first share of stock. But beyond that initial trade, you invest commission-free. Once you've bought your first DRIP share, the rest of your buying is handled directly by the company. By eliminating the middleman, says Carlson, DRIPS can pump up your returns by an average of 10% over 10years.

Some companies have stock option plans that allow you to buy stock directly from the company, often at a reduced cost. A valuable feature associated with DRIPS is that most companies give a discount on the price of the stocks. Those companies that reinvest dividends at discounts from the market price include Northern Telecommunications, American Express Co., Texas Utilities Co. and J.P. Morgan Inc.

Typically, you can get 3% to 5% off stock prices, but a handful of companies offer discounts of as much as 10%. So, reinvesting $100 of dividends in a company that offers a 5% discount would give you $105 worth of stock.

Getting Your Money's Worth

Essentially, participating in a DRIP is an easy, money-saving way to build up stock. Your stake in that company grows dramatically overtime thanks to compound interest.

The power of compounding is evident in the gains of the S&P 500 index over the past 15 years, according to Standard & Poor's Directory of Dividend Reinvestment Plans. The biannually updated book lists 750 companies that offer reinvestment plans, along with historical dividend statistics and a quality ranking of each company's stock. S&P 500 stock gains climbed 288% during that period; when stock dividends were plowed back, however, the increase amounted to a staggering 634%.

Indeed, the returns on stock where dividends have been reinvested are impressive. Say for example you had an individual stock investment. If you had put $1,000 in to buy shares of Merck & Co. back in 1981 and reinvested the dividends, your money would have grown to $13,175 in 10 years.

Other DRIP companies where dividends have increased more than 100% over the past five years, according to Standard & Poor's, include The Stride Rite Corps., Limited Stores Inc., Abbott Laboratories, J.C. Penney Co. Inc., Pepsico Inc., H.J. Heinz Co. and Kellogg Co.

Another case in point for dividend reinvesting: If you had invested $5,000 in the Oppenheimer Special Fund (a stock growth mutual fund) and done nothing to it for nearly 10 years (12/82 to 5/92), your initial investment would have secured 277 shares with a market value of $4,709 (after commission). By reinvesting all dividends and capital gains, your money would have flourished to $16,803 in 10 years. Moreover, your total number of shares would have doubled to more than 648.

Since most companies don't charge a fee for joining a DRIP, every cent you invest goes toward the purchase of more shares. Most plans also allow you to make optional cash purchases.

For those investors who want some of the income from their stock investments, several plans allow participants to reinvest only part of their dividends. If you own 500 shares, for example, you could invest the dividends on half the shares and get the cash payments on the other 250 shares.

A Good Buy

Dollar-cost averaging is another benefit of DRIPS. This systematic buying of investments at set dollar amounts and at fixed intervals lets you earn some profit on your stock regardless of whether the market is heading up or down. In fact, you are buying fewer shares when prices are high and more shares when prices are low.

When you buy in this disciplined manner, you will avoid making hasty market-timing decisions. Most investors tend to purchase shares at the peaks of the market, when a particular stock is popular. in falling markets, investors are inclined to panic and end up selling their shares at the worst possible time--when the market bottoms out before rebounding. There are some pitfalls, though. There's no guarantee when you redeem your shares that the average cost through dollar-cost averaging will be lower than the market value. On average, bull markets last longer than bear markets. Therefore, you may not be able to buy enough low-cost shares during down cycles to make dollar-cost averaging as profitable as if you had invested a lump sum in up cycles.

As with any investment, there are some drawbacks to investing through DRIPS. For instance, you must report your dividends as taxable income although you don't actually receive them. And you don't have any control in timing purchases. Make sure that the company's principles match your financial objectives. Hoards of information can be found in a company's annual report. It will pay off to do a little homework to help you decide which DRIPs are right for you.

F.Y.I.

INVESTMENT TIP

A promising stock that investors might like to add to their portfolios is General Binding Corp. (GBC), the international manufacturer of business supplies. The Northbrook, Ill.-based company is experiencing solid, steady growth. However, the introduction of a new generation of binding systems this fall could boost the company's earnings growth to an all-time high. GBC is also expected to reap the benefits of the office products market, which is projected to grow rapidly. Call 708-272-3700.

Renting To Own

In these tight economic times, renting to own (RTO) may seem like a better bargain than purchasing goods outright using cash or credit. Actually, you could end up paying more. The Council of Better Business Bureaus Inc. (CBBB) is now offering Tips On ... Renting To Own, as part of its Consumer Information Series. The pamphlet gives advice on such matters as scrutinizing contracts, learning the consequences of late payments, servicing the merchandise and ending your rental-purchase agreement. Call the CBBB at 703-276-0100.

MUTUAL FUND UPDATE

Investors are scurrying to find investments rendering double-digit gains, especially with many short-term and long-term funds handicapped by low yields. But anyone who is willing to assume moderate risk in search of higher yields might want to consider investing in short-term corporate (AAA-rated) and U.S. government funds. For safety, there are few investments that beat mutual funds holding U.S. Treasuries.

The top 10 government funds, based on five year total returns, and ranked by New York-based rating service, Lipper Analytical Services, are:

* Dreyfus Short-Intermediate Govt., +56.14%.

* Federated Intermediate Govt., +55.44%.

* SE1 Cash + Intermediate Govt.; A, +54.72%.

* Fidelity Advisor U.S. Govt. Income, +54.69%.

* IDS Federal Income, +54.12%.

* Landmark U.S. Govt. Income, +53.84%.

* Asset Management Financial: Intermediate Term. Liquidity, +53.55%.

* Merrill Institutional Intermediate, +53.43%.

* Delaware Group Treasuries: Investors II, +51.93%.

* Trust for Federal Securities: Short Fund Govt.: Short Govt. Shares, +51.42%.

F.Y.I.

SUPER DEAL

Have you ever been at the supermarket and discovered you were low on cash and didn't have your checkbook? Well, stores are now offering a quick-and-easy solution to the problem--charge it!

A growing trend in the supermarket industry is the acceptance of major credit cards to purchase groceries. MasterCard International, New York, has launched a nationwide "Super Marketing" program in which added-value to the consumer is the thrust.

According to Clark Crowdus, director of New Merchant Marketing for MasterCard, using MasterCard at the supermarket saves consumers time and money, since they can stock up on sale items. And customers don't have to pay for the merchandise until 30 days later when they receive their bills. In addition, MasterCard mandates that no minimum purchase be required (as most state laws do).

The program also offers qualified supermarket merchants a lowered MasterCard intercharge rate of 1%. At the present time 5,300 out of approximately 30,000 supermarkets accept MasterCard. For more information call 212-649-4600.

SECURITIES' SEARCH

Probus Publishing Co., Chicago, is now offering a revised edition of The Handbook of Mortgage-Backed Securities. The 1,254-page book provides the latest expert advice on the industry, including Collateralized Mortgage Obligation bonds. The book is available in hardcover for $75. Call 800-776-2871.

U.S. SAVINGS BONDS

Investing in U.S. Savings Bonds for college funding and retirement may not be as economically savvy as most people think, according to the Journal of the American Society of CLU & ChFc.

The interest rate for savings bonds is set at 85% of the yield on five-year Treasuries and provides a guaranteed minimum return of 6%. Investors in the 15% tax bracket may maximize their investment dollars by buying five-year Treasuries instead, realizing a 100% return on their investment. On the other hand, a person in a higher tax bracket--say 31%--can better suffer the 15% loss in yield.
COPYRIGHT 1992 Earl G. Graves Publishing Co., Inc.
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1992, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

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Title Annotation:includes related articles
Author:Prioleau, Patrick S.
Publication:Black Enterprise
Date:Sep 1, 1992
Words:1761
Previous Article:Stopping traffic.
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