Drips are usually promoted to people who are unsophisticated investors. They are not an appropriate first investment because you don't get diversification.
New investors should NOT start out buying individual stocks. They should start out buying very low cost (no load) index mutual funds from places like Fidelity, Vanguard, T. Rowe Price and a few others. Some suggested conservative Vanguard Index Fund portfolios are given in the article here .
I used a company dividend reinvestment program for IBM in the 1980's and 1990's. Doing my taxes was horrible when I finally sold some IBM to take profits. If I had to pay someone to do my taxes to account for all the years of accumulating a small number of shares each year, the cost of accounting for my reinvested dividends may have exceeded what I made! As it was, it took hours to figure out my gains on each little investment.
You can avoid the tax nightmare if you do dividend reinvestments in your IRA. Of course, this doesn't solve the problem of diversification, of lack of diversification.
If you want to reinvest dividends in a "stock like security" inside your IRA, then consider VTI. VTI is a "Viper" from Vanguard that you buy and sell like a stock. It represents the Wilshire 5000 which is the "total stock market." Here is a summary of VTI from Yahoo!
- The investment seeks to track the performance of a benchmark index that measures the investment return of the overall stock market. The fund employs a passive management strategy designed to track the performance of the MSCI US Broad Market index, which consists of all the U.S. common stocks traded regularly on the NYSE, AMEX, or OTC markets. It typically invests substantially all of assets in the 1,300 largest stocks in its target index, thus covering nearly 95% of the Index's total market capitalization.
- Total Expense Ratio = 0.07%
Most major brokerage houses will let you buy VTI with a single commission then they will let you reinvest the dividends with no extra fee. This works great if you have a small amount to invest one time and don't qualify to buy the minimum investment at the mutual fund companies directly. If you want to make regular investments, then you can save the commission costs and buy the Wilshire 5000 index mutual fund directly from the fund family.
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I welcome suggestions for future articles at Kirk's Market Thoughts.
DISCLAIMER: I own Vanguard's Total Stock Market Index fund and recommend it in my newsletter.
Kirk Lindstrom: Answers & my words are general in nature, are not meant as specific investment advice, and do not necessarily represent the opinion of anyone but Kirk. Individuals should consult with their own advisors for specific investment advice.
Kirk Lindstrom - With my writing, I hope to help you too reach AND MAINTAIN critical mass where your investments earn enough money that you don't have to ...
