All About Drips And Dsps

First Chapter

CHAPTER 1

WHAT ARE DRIPS AND DSPS?

Key Concepts

• A Brief History
• Benefits of DRIP Investing
• DRIP Investing Disadvantages
• Costs Associated with DRIPs
• The Strategy and Advantages of Dollar Cost Averaging
• Overall DRIP and Direct Investment Strategy

The long-term accumulation of stock assets using Dividend Reinvestment Plans (DRIPs) is an investment strategy where company dividends are invested in additional shares of company stock rather than being paid in cash. DRIPs allow investors to add to the dividend, increasing the amount invested, without paying standard stock brokerage commission. Some DRIPs buy and sell shares free of fees to the investor, whereas others charge small fees. Numerous companies reward shareholders by paying quarterly, semiannual, or annual cash dividends. As a return to shareholders of company profits, dividends are viewed as a powerful method to attract and develop shareholder loyalty. Over time, as corporate earnings increase, dividend payouts also should increase. Shareholders who elect to invest in additional shares of stock rather than cash dividends receive a double bonus: The shares received generate more dividends and the shares should increase in value over the long term. Many companies offer shareholders the opportunity to send in optional cash contributions (OCP) to be added to the next dividend payment, increasing their total dollars invested.

Originally, DRIPs required the investor to first buy some shares through a registered broker and to have the shares registered in the investor's name. Once the investor became a registered shareholder, with proof of ownership using an actual stock certificate, he or she was eligible to enroll in the company's DRIP. About 60 percent of DRIPs still have this requirement.

DRIPs have mutated since their initial rise in popularity during the 1960s. The DRIP strategy may include the ability to buy both the initial investment and the reinvested dividend shares directly from the company or its transfer agent, bypassing the commissioned middleman altogether. This is commonly called Direct Investing, which is officially known as Direct Enrollment Stock Purchase Plans (DESPs) or Direct Stock Purchase (DSP).

DRIP and direct investing strategies are a proven method of successfully building stock assets over the long term. According to the April 19, 1999, issue of Barrons Financial Weekly, every $100 invested in the S&P in 1925 would be worth $235,000 at the end of 1998, using the long-term strategy of reinvestment of dividends. However, the original $100 would have grown to about $9600, with the balance $225,400 coming from dividends and capital gains from additional stock purchased with those dividends.

A BRIEF HISTORY

For the past half century or so, numerous companies found it advantageous to issue new shares of stock rather than pay a cash dividend. A few of the early leaders in type of offering were AT&T (T:1969), American General (AGC:1962), Dow Chemical (DOW:1970), and PPG Industries (PPG:1967). By presenting newly issued stock to current shareholders, companies were able to raise fresh capital without the required Securities and Exchange Commission (SEC) government filings and paperwork required for secondary stock offerings. Substituting newly issued shares for dividends was less expensive to the company than the costs associated with underwriting secondary offerings through the brokerage houses. In the economic and population boom of the 1960s, utility companies were consistently in need of new capital to build our country's basic infrastructure. Utilities discovered that current shareholders were excellent prospects for the sale of new stock, and they moved to motivate investors to enroll in their DRIPs. A few companies began offering discounts on the share price of up to 5 percent if existing shareholders would send in extra investment money, also known as OCPs. In other words, some utility companies would sell stock to their current shareholders for 5 percent less than the cost on the open market. This trend, although used by few companies today, offers DRIP investors the opportunity to buy investment assets at a discount, increasing long-term capital gains.

According to netstockdirect.com, a leading Internet DRIP resource, there are currently 115 companies that subsidize an investor's cost of stock purchases by offering discounts on their DRIPs. For example, Philadelphia Suburban Corp. (PSC), one of the largest investor-owned water utilities with over 1.8 million customers in the midwest and northeast, offers DRIP investors a discount on their dividend reinvestment purchases. PSC's formula is to charge 95 percent of the average high and low prices for 5 trading days prior to the investment date. An investor owning 49.28 shares in their DRIP program on April 1, 2000, would have received a dividend payment of $8.87, which would be used to purchase 0.52 shares at a transaction price of $16.96 per share. The market price on that day was $18.18, reflecting a DRIP purchase discount of $1.24 per share, or 6.8 percent. PSC's DRIP allows for initial direct investments of $500, OCP minimum of $50 a month and maximum of $30,000 a month, and the plan is free.

Why would a company want to have DRIP and direct investors? Because DRIP investors frequently are characterized as smaller investors compared with large mutual funds and asset-managed trust accounts. DRIP investors are frequently long-term thinkers and provide a more stable investor base. Many mutual fund money managers move in and out of a stock based on short-term goals and rewards, with a fickleness that reflects the emotions of the market. In contrast, long-term DRIP investors tend to dollar cost average their purchases, and many view a drop in a stock's share prices as an opportunity to increase their long-term share holdings rather than a time to sell.

Companies have also learned that individual shareholders can become a powerful new source of potentially loyal customers, and an expanding DRIP investor base can translate into higher company sales and profits. Some companies offer product discount coupons in their annual reports to encourage current shareholders to buy their products.

With DRIPs, stock ownership is registered in fractional shares because the dividend amount available for stock purchase is typically only a fraction of a share. This facilitates small dollar investments. Share ownership in a DRIP account is usually expressed up to three decimal places. It is not uncommon for small DRIP accounts to initially reinvest dividends that will purchase tenths of a share of stock. Many DRIP programs will accept as little as $10 to $25 for OCPs. For example, a $25 net investment in a $75 stock would equate to purchasing 0.333 shares, and a $5000 net investment in a $54 stock would equate to 92.592 shares. Future dividends are paid on the total shares owned on the Day of Record, including the fractional shares.

To participate in a company's DRIP, the investor must already be a registered shareholder of a minimum number of shares; typically just one share is needed. This is the only common thread throughout the field of DRIPs and direct investing. Once an investor is a registered shareholder, these companies allow enrollment in whatever program they offer.

For Internet users, NetStock Direct Corp. offers the premiere on-line direct investing resource website at www.netstockdirect.com. Depending on the specific company's plan details, NetStock's no-fee service allows for automatic bank withdrawals to pay for DRIP purchases. Many companies at NetStock's website also allow DRIP investors to complete enrollment forms online. Investors then print the complete forms and mail them along with a check for their initial purchase.

Intimate Brands (IBI) is a recent newcomer to the world of DRIPs. Spun off by The Limited (LTD) in 1995, IBI is the leading specialty retailer of intimate apparel, beauty, and personal care products. IBI distributes products using the Victoria's Secret, Bath and Body Works, and White Barn Candle Company brand names. LTD still owns about 82 percent of all outstanding shares of IBI. To encourage shareholders to become customers, IBI includes discount coupons for lingerie and personal health care items in their annual report. In the summer of 1999, IBI decided to offer a dividend reinvestment and direct investing program. IBI is a whiz at product marketing, and the announcement of their DRIP program came with much fanfare. IBI took out full-page advertisements in important newspapers like The Wall Street Journal and The New York Times, with pictures of their famous scantly clad "Vicky Se's" models directing readers to the IBI Invest Direct link at their website or to an 800 phone number for their transfer agent. IBI's plan includes a minimum initial direct investment of $500 and minimum OCPs of $100. Maximum purchases are currently set at $250,000 annually. There are rumors that the IBI introduction of their DRIP program may have set a record for attracting the most number of DRIP investors in the shortest amount of time, although not particularly low in their fee structure. During the first 60 days after the introduction of their DRIP and directing investing plan, IBI's online DRIP enrollments and requests for forms through NetStock Direct accounted for over 62 percent of all requests received during the first 6 months.

BENEFITS OF DRIP INVESTING

The primary benefits to DRIP investors revolve around the following investment philosophies:

• DRIPs allow small investments (or large investments if the investor is financially capable) to be invested regularly in a diversified portfolio of stocks that will grow into much larger amounts of money some sunny day in the future.
• DRIPs increase long-term investment returns. Compounding an increasing dividend, added to the discipline of regularly scheduled stock purchases or dollar cost averaging, is a superior recipe for accumulating long-term assets.
• DRIPs save on fees. DRIPs and direct investing programs save the cost of brokerage fees and the hidden costs of mutual fund asset-based management fees, and they avoid phantom capital gains tax exposure.

It has been proven that a one-time investment of $10,000 at age 20 will yield $1.35 million at age 65 based on an average 11 percent annual return. Invest $38 a week over 40 years at 11 percent annual return and it will also generate well over $1 million. Over the past 50 years or so, the S&P 500 Index has averaged a 12.5 percent annual return.

Now look at this in terms of reinvestment of dividends. According to Joseph Tigue and Joseph Lisanti, authors of The Dividend Rich Investor, a one-time investment of $1000 in the S&P 500 in 1980 would have been worth $4530 in 1995. However, if the investor reinvested the dividends into more shares, the same $1000 would have grown to $7,940. Keep the dividends in your investment portfolio and the investment returns in real dollars will increase substantially. Optional cash payments to DRIP accounts of as small as $170 a month can grow into over $175,000 in 20 years and over $600,000 in 30 years, at a 12.5 percent annual return.

Reinvesting dividends is like an investment savings account. With any bank passbook, savings, or money market account, the cash balance earns interest that is added to the account, increasing the cash balance and increasing the interest earned in the next payment period. This is called compounding of interest.

DRIPs are the easiest method of transferring the power of compounding interest from passbook accounts to stock investments, but at more advantageous returns. Similar to crediting your passbook's cash balance with interest, the companies (or their transfer agents) buy additional shares of stock with your cash dividends, crediting these shares to your account. This higher share balance will generate higher cash dividends next payment period, which, in turn, is used to buy more shares. The cycle continues until the DRIP investor elects to withdraw.

An advantage of compounding dividend returns over compounding interest is the long-term impact of regularly increasing dividends and stock appreciation. Well-managed companies will reward long-term investors with dividend increases, either in cash or additional stock. As a means of returning company profits back to shareholders, top-quality management over time will not only increase corporate cash flow and earnings per share, but dividends as well. The 2000 S&P Directory of Dividend Reinvestment Plans lists over 247 companies offering DRIPs where dividends have been increased every year for 10 years since 1989. These include companies like AFLAC (AFL), Century Telephone (CTL), Disney (DIS), Federal Signal (FSS), Kimberly Clark (KMB), Pfizer (PFE), Pitney Bowes (PBI), and Walgreens (WAG).

The quickest way to find out how long it would take to double your money at a compounded constant return, use the Rule 72. Divide 72 by the anticipated yield and the answer is the number of years need. For example, the value of an account holding a utility stock with a dividend yield of 7.2 percent, and no capital appreciation and no further dividend increases, will double in 10 years on just the compounding of the dividend (7.2 percent yield divided by 72 5 10). A 6.0 percent government bond will repay the entire face value in compounded interest over 12 years (6.0 divided by 72). In the same way, use Rule 115 to calculate the time it takes for money to triple. Divide 115 by the constant return rate. For example, the utility stock account would triple in 16.5 years (7.2 divided by 115 5 16.5) and the government bond in 19 years (6.0 divided by 115).

When an investor buys shares of stock over time, with a range of prices (both high and low) using the average cost of the stock, it is called dollar cost averaging. Because stock prices go up and down, investing $1000 every month for a year will typically purchase a different number of shares at different prices. With scheduled investments, such as this monthly example, the investor pays the average stock price for the investment period rather than risk market timing errors with a single purchase. DRIPs are best viewed as a cost-effective and flexible investing plan for implementing dollar cost averaging.

Many programs allow investors to have OCPs electronically deducted from checking or savings accounts. These bank-to-bank movements of your money are called automated clearing house (ACH) transfers or electronic funds transfer (EFTs), and they are easy to use. They facilitate the discipline of regular monthly investing. Based on an individual company's DRIP program, ACH investments can range from as little as $10 a month to as much as $20,000 a month.

DRIP programs do not charge annual management fees, asset-based fees, or advertising fees. If any, the only fees associated with DRIPs are collected when investments are bought or sold. With mutual funds, there is the special problem of phantom capital gains, and these gains are considered taxable income for both the federal and state tax collectors. When a mutual fund sells a position for a gain, the capital gains tax liability is passed onto all fund investors and is reported to the IRS as taxable capital gains. This is known as "phantom capital gains tax exposure." Depending on the specific fund's situation, this annual phantom capital gains exposure could be substantial when reviewed from a long-term prospective. With DRIPs, the investor controls the timing of all capital gains by controlling when the stock is sold.

With most programs having low minimum investment requirements and with many plans offering very low transaction costs, DRIP investing is almost effortless for an investor seeking to develop a long-term, diversified portfolio. For as little as $3000 to $4000 in initial capital and $200 to $400 a month in OCPs, an investor is capable of accumulating one stock in each of the eight S&P industrial sectors.

DRIP INVESTING DISADVANTAGES

There are several investing quirks associated with DRIP and direct investing programs. First is the record keeping needed to properly calculate share purchases and costs to determine future taxable capital gains. Each dividend and OCP creates separate share purchases at specific prices. With the advent of computer spreadsheets, however, maintaining an acceptable log of DRIP purchases is fairly easy. A sample year 1999 DRIP investment log for 33 shares of Sears (S) with no OCPs may look like this.

If OCPs were used, either automatic bank transfers or check, the amount invested would have been entered. Each DRIP statement usually includes all transactions since the first of the year, which makes log updates easy and not very time-consuming. Year-end annual DRIP account statements and a DRIP investment log should be kept with all tax records.

Second, a potential drawback is that DRIP programs trade shares on a specific date regardless of market price. For example, a company may purchase shares once a week on Tuesdays, once a month on the 15th day, or once a quarter on the dividend payment date. This precludes the choice of either overall market timing or stock price limit orders (buying shares at a specific predetermined price only). Selling or withdrawing from a DRIP frequently requires sending written requests. Shares are sold on the same timetable as the regularly scheduled DRIP purchases. OCPs waiting for investment in a DRIP account do not usually earn interest. These drawbacks should not be a problem if the investor is focused on long-term opportunities.

Third, there are minimum and maximum OCP dollar amounts. Although not commonly a problem, DRIP investors need to be aware of specific program limits. Some programs have very high maximum limits, such as $10,000 a month or over $200,000 a year, whereas others have OCP maximum limits as low as $1000 a month.

Dividends are considered taxable income and, just like earned income, the government wants its share. If an investor enrolls in a DRIP program where the cash dividends are reinvested, the income tax due will be paid from earned income. Although not usually a huge problem, some DRIPs allow for partial reinvestment of dividends. This means that an investor can reinvest a portion of the dividend and receive cash for the balance.

DRIPs are not for day traders, short-term traders, or investors with less than about a 3- to 5-year investing time frame. DRIPs are most popular with investors who are looking to make a long-term investment commitment to a specific management team, and whose goal is to reap potential capital gains from rising stock prices.

COSTS ASSOCIATED WITH DRIPS

DRIP fees are split into two major categories. DRIPs are segregated based on how the first shares are acquired. Either the investor buys these shares directly from the company (or its transfer agent) or from a broker.

Of the over 1600 companies offering DRIPs and direct investing options, more than 40 percent will sell the initial shares directly to the investor. These programs are called direct stock purchase (DSPs) or direct enrollment stock purchase programs (DESPs). With the easing in the mid-1990s of SEC rules regulating DRIPs and direct investing plans, more companies are allowing investors to purchase shares directly from them or their transfer agents.

Sixty percent of DRIPs require the investor to purchase initial shares elsewhere. The shares must be registered in the investor's name, and then the investor may enroll. These companies demand investors become a shareholder of record. To be a shareholder of record, investors need to purchase their initial investment through a broker and take physical delivery of the certificate of shares, thereby notifying the company that the investor is the shareholder. After enrolling, the investor sends any future OCPs directly to the company or to its agent. With these plans, there is initially a third-party broker commission along with a delivery of share certificate fee. This requirement makes the initial cost to establish these plans much higher than plans that allow for an initial direct investment. When returning the DRIP enrollment forms, an investor can include the stock certificate, and thus the number of shares is credited to the account.

For instance, Home Depot's (HD) DRIP program offers investors the option of sending directly to the company a minimum of $250 as an initial investment. HD purchases the initial stock for the DRIP accounts on the open market every week and sends a statement to the shareholders detailing their stock positions. In contrast, Honeywell (HON) requires an investor to be a registered shareholder of at least one share prior to enrolling in its DRIP program. To be a DRIP participant with Honeywell, an investor first needs to develop a relationship with a brokerage firm on-line, discount, or full service. There are minimum brokerage account balances and stock trade commissions along with share delivery fees associated with establishing an account through a broker. After the initial investment is purchased and the stock certificate has been received, the investor contacts HON and enrolls in its DRIP.

DRIPs are also categorized by whether a transaction fee is charged. Once a DRIP is established, the program may levy a fee to purchase or sell shares. Almost half of all companies offer totally fee-free DRIPs, and there is no cost to the investor to purchase or maintain his or her DRIP investment. Companies that offer stock investing free of fees include some big names such as Coca-Cola (KO), Exxon-Mobil (EXM), Intel (INTC), and Pitney Bowes (PBI). Fee-free DRIP companies range in size from the giant conglomerates like Johnson and Johnson (JNJ) to small local banks like 1st Federal Bank (FFLC) in Florida. At last count, more than 750 companies offer fee-free DRIP programs.

Other DRIPs stipulate transaction fees for the purchase and sale of shares and may include some of the following costs:

• Set Up Fees: $5 to $15 to establish a DRIP account
• Termination Fees: $5 to $15 to sell all shares and terminate the DRIP program
• Commissions: Fees vary per purchase or sell transaction. Some programs charge flat per share fee ranging from $0.03 to $0.15 a share. Others charge a small percentage of the investment up to a maximum of between $2.00 and $25.00. Some charge both.

It is common for programs to charge as little as $1 per trade if the investor signs up for automatic ACH withdrawals. Some plans charge fees for termination only and some for each transaction. However, even a DRIP with relatively high fees can be an attractive and cost-effective method of accumulating shares of stock.

For example, Chicago Bridge and Iron (CBI), a Dutch company headquartered in the United States, builds oil terminals, cryogenic testing facilities, and large industrial complexes. As a Dutch company, CBI's shares are traded as American Deposit Receipts (ADR), where one share on the New York Stock Exchange equals one share traded on the Dutch exchange. Also, as foreigners, U.S. citizens are subject to a 15 percent withholding on their dividends. CBI has a relatively high-cost DRIP program with a one-time $10 setup fee, a flat $5.00 fee per OCP, and a charge of 5 percent of the dividend up to a maximum of $5. There is a $0.10 per share commission and a $5 fee to terminate the plan. Minimum initial direct investment is $200. Minimum OCP is $50 a week and a maximum of $250,000 per week. A DRIP investor who purchases CBI stock at a dollar cost average price of $16 per share and an annual dividend of $0.24, with a $250 initial investment and $250 a month ACH investment, would pay several different DRIP fees. CBI would charge the investor estimated first-year fees consisting of a one-time $10 setup fee, a $5 fee for the initial investment of $250, a $1.56 commission for the initial investment, a $5 fee for each monthly investment of $250, a $1.56 commission for each monthly investments, and a $2.43 fee (5 percent of dividend to a maximum of $5) per quarterly for dividend reinvestment.

At the end of the first year, the investor would have invested $3250 and paid about $105 in DRIP fees (3.2 percent). If the investor had the financial ability to double the investment to $500 initially and $500 a month ACH, or $6500 the first year, CBI's DRIP fees would have been about $135 (2.0 percent). Had the investment goal been to accumulate $25,000 in CBI stock over a 12-month time frame using a $1000 initial investment and dollar cost averaging an OCP of $2000 a month, DRIP fees would be about $251 (1.0 percent). A one-time investment of $25,000 would carry first-year DRIP fees of $191 (7 percent). If there are no additional OCP investments, quarterly fees going forward for reinvestment of dividends would be $5. As with standard brokerage fees, the more dollars invested in CBI, the lower the purchase fees.

Some investors insist on investing only with companies charging no DRIP fees. Some avoid all high-fee DRIP programs. This is a bit like the tail wagging the dog. DRIP fees are an important consideration in stock selection, but the quality of management and anticipated future earnings and dividend growth should have a much greater impact on total investment returns.

THE STRATEGY AND ADVANTAGES OF DOLLAR COST AVERAGING

Dollar cost averaging is an investment technique that spreads investment dollars over time and rides the fluctuations of a stock's price up and down. It requires a discipline of maintaining long-term regularly scheduled investments. Instead of taking chances with market timing for specific stocks, the dollar cost averaging mechanism invests on a regular timetable. The investor's principal buys shares when the stock is down and fewer shares when the stock advances. Much like an installment plan, dollar cost averaging with DRIPs allows investors to pay for either a predetermined goal of a specific number of shares or a reasonable dollar amount invested regularly over a specific time frame. For example, an investor wanting to own 100 shares of a stock could purchase 10 shares each quarter during the next 10 quarters. An investor may want to own $20,000 of a stock, regularly investing $1000 a month for 20 months.

As part of its blueprint, stocks are purchased during both weak and strong market cycles. Dollar cost averaging advocates the accumulation of shares in down cycles that later outperform those bought during strong market cycles.

The total investment of $2500 purchased 146.88 shares with an average cost of $17.02 a share. The investor's average share cost is 15 percent below the average market price of $19.60 over the same time period. Due to buying more shares when a stock is cheaper, a dollar cost averaging portfolio will always have an average cost lower than the average market price.

The total investment of $2500 again purchased 146.88 shares, with an average cost of $17.02 and an average market price of $19.60. With the stock down in price and an average cost below the average market price, to break even on the investment principal the stock would have to rally to $17 for the dollar cost averaging investor rather than rallying to almost $20 to reach the average market price.

A dollar cost averaged $2500 investment would have purchased 112.51 shares with an average cost of $22.22 a share or 7.4 percent below the average market price of $24.00 a share, also creating additional gains.

Dividend reinvestment programs with an ACH bank transfer alternative provide a cost-effective tool for an automatic saving and investing plan using a long-term dollar cost averaging strategy. If an investor makes regular stock purchases, increased investment returns over the long term can become standard.

OVERALL DRIP AND DIRECT INVESTMENT STRATEGY

DRIP investing maximizes the benefits of compounding returns from both an increasing cash dividend and dollar cost averaging stock purchases. DRIPs are long term in nature, and direct stock purchases and sales are not usually efficient for short-term investors. The goal of DRIPs is to accumulate stock assets over the long haul and to build personal wealth one dividend payment and OCP at a time. Minimum long-term DRIP horizons should be in the range of 3 to 5 years, and many investors maintain a DRIP account for 35 to 50 years. It is not uncommon to establish a specific investment dollar or number of shares goal per DRIP account; when that is reached, OCPs are transferred to a new DRIP investment, letting the dividends of the initial stock selection continue to accumulate.

On April 14, 2000, the Dow Jones Industrial Average experienced its largest single-day point drop ever: falling 617 points. CNN's leading financial newscast, MoneyLine, interviewed the chief economist for Merrill Lynch. When asked who was doing the selling, the chief economist replied, "It was not the little guys and it's not the long-term investor. Our studies of stock market corrections over the past 30 years indicate that 55 percent of long term investors do nothing. Twenty percent of long-term investors add to their stock positions during market corrections and only 25 percent sell positions." The point drop, by and large, was not caused from DRIP investors unloading their shares. DRIPs and direct investing programs have become the ultimate investing tool for the buy and hold investor.

The most popular alternative to DRIPs and direct investing is to buy a mutual fund and forget about it. Many investors do not make the time to research investing opportunities and depend on fund managers, but at a cost. Have you ever wondered why there are over 7000 mutual funds listed in The Wall Street Journal and other financial newspapers? The answer is simple: We live in a capitalist society, and the mutual fund asset management business is extremely profitable. Asset managers thrive off the annual fees investors pay them based on the current value of their investment. As the account values increase over the years due to higher additional contributions, dividends, and capital gains, so do the annual management fees.

DRIP investing offers much lower transaction costs than most mutual funds without asset-based management fees. DRIP investors find they are putting more of their hard-earned money to work for them. With low minimum monthly and relatively high maximum OCPs, DRIPs and direct investing options are an easy method of developing a diversified portfolio of both stocks and bonds, regardless of whether the investment is $100 or $100,000. Much like the most popular of funds, long-term investors should have exposure to all industrial sectors and invest in both stocks and bonds. It is easy to develop a list of top-quality diversified companies offering DRIPs with no ongoing purchase fees and allowing investors to purchase the initial shares direct. This list includes: BellSouth (BLS), a telecommunications company and one of the Baby Bells; Connecticut Water Service (CTWS), a water utility company serving the Northeast; McGraw Hill (MHP), publisher of this book; 3M (MMM), a consumer products giant; Pfizer (PFE), a leading pharmaceutical company; and Washington Mutual (WM), the largest savings and loan institution in the United States.

It is important to select all investments carefully. With long-term investing, well-managed companies that focus on improving shareholder value are preferred to incubator start-up firms with no real cash flow, profits, or dividends. Benjamin Graham is considered by many to be the Father of Value Investing. Warren Buffett, the multibillionaire from Omaha, is his most famous student. Graham believed that well-managed companies provide the best long-term investment returns over the long haul. Although every investor may not agree with most of the investment commandments preached by Graham, they provide a useful yardstick in measuring an investor's own experience. Our favorites are:

• Be an investor, not a speculator
• Understand the difference between price and value
• Rake the market for bargains
• Don't expect every decision to be perfect
• Rule a1: Diversify with stocks and bonds
• Rule a2: Diversify with a wide range of stocks
• When in doubt, stick to quality
• Be patient
• Think for yourself

With these simple guidelines, a DRIP investor can easily build a rewarding long-term investment portfolio.

EXAMPLES OF LONG-TERM DRIP INVESTING

Assume an investor decides to initially invest $1000 in 1989 in three different DRIP programs, to reinvest all dividends, and to add an additional OCP of $200 a year to each. This investor chooses Johnson Controls (JCI), a leading manufacturer of automobile interiors and auto parts; Apache Corp (APA), a mid-size oil exploration company; and SunTrust Banks (STI), a Southeastern regional bank. Tables 1û5 to 1û7 outline the DRIPs in each stock from 1989 to 2000.

In these three stocks, the individual initially invested $3000 and over the next 12 years contributed an additional $10,200 for a total capital contribution of $13,200. The portfolio is worth $42,586 ($11,756 in Johnson Controls, $15,218 in Apache Corp, and $15,612 in SunTrust Banks) and is generating $642 a year in dividends, offering a current portfolio yield of 1.6 percent. Since establishing the DRIP programs, the investor has received over $3800 in dividends, and the current cash dividend yield based on the capital contributed would be about 4.6 percent, respectable by most standards.

If the investor had been a really high roller back in 1988 and had the financial resources to invest $10,000 combined and $2000 annually in JCI, APA, and STI, the capital invested in each DRIP account would have been $34,000, for a total capital contribution of $134,000. The portfolio would be worth over $424,200 ($117,200 in Johnson Controls, $151,500 in Apache Corp, and $155,500 in SunTrust Banks) and generating $6400 a year in dividends. The total dividends received over this period would have equaled almost $40,000.