DRIP Investing, Step by Step

Buying a Share from a Broker

A final way that an investor could acquire the initial shares necessary for enrolling in a dividend reinvestment plan is to buy them from a brokerage firm. There will be some additional expenses connected with this method, but it may be viable for some investors.

First, you'll need to open a brokerage account. There are two types of brokerage firms: discount and full-service.

A discount brokerage firm does not provide personalized investment advice to its customers; investors who open accounts at these firms do their own research and make their own decisions about stock sales and purchases. As a result, commissions at the discounters are much lower than at full-service firms, with minimum commissions as low as $7 per trade to as high as $40 per trade. Most discount brokerage firms deal with customers primarily through their web sites. Some of the most popular or best-known discount firms include Charles Schwab, TD Ameritrade, E*Trade, Scottrade, Muriel Siebert, and Firstrade.

If you open an account with a full-service brokerage firm, you'll be dealing directly with a licensed broker. Your broker will work with you to defin your objectives, risk tolerance, and knowledge about investing, and then provide you with customized advice as to how to reach your goals. You pay for this advice, of course, in the form of a commission on each stock sale or purchase, typically 3%. Full-service firms include Merrill Lynch, Prudential, Morgan Stanley, A.G. Edwards, and Raymond James Financial.

Your bank may also offer brokerage services, too. Banc of America and Wells Fargo are among the firms that offer discount brokerage services, and bank account holders at those firms can buy and sell securities for $10 per trade.

One downside of this approach is that in order to open an account, you must have the minimum amount required by the firm before you can make a trade in your account. In many cases, that's $500 or $1,000, but it's worth checking around to see what firms might let you open an account with less. (Watch out for monthly "account maintenance" fees if your balance falls below a certain amount, as well.) Full-service brokers might not be interested in working with smaller accounts, but they may also waive the minimum commission for a single-share purchase if they do decide to help you out.

Besides the commission that you'll pay to buy the share(s) that you need to enroll in the DRIP, there's another cost of which you must remain aware. Because you'll need to hold the share directly in your name in order to enroll in a DRIP, you'll have to ask the brokerage firm to issue a stock certificate for your holding--and they'll almost certainly charge you a fee for that service. Expect to pay $25 to $50 to have the certificate issued to you. (Note: you'll only receive one physical certificate per stock, whether you own one share, 10 shares, or 10,000 shares.) It may take several weeks for your certificate to finally be issued by the company's transfer agent and reach you in the mail.

The costs of using this approach to start your DRIP portfolio can really start to add up quickly. Remember that most of the costs will be one-time charges. Once you're enrolled in the DRIP, you might only have to pay nominal charges and fees in order to make additional cash purchases, and over time the hefty startup costs will become less and less of your total investment in the stock.

If the costs of this approach are outside your budget, you might consider using the buddy apprach. If you enlisted four friends to get together to purchase five shares of a DRIP company in one of your friend's brokerage account, you could split the commission costs and fees five ways. The actual purchaser would request that the brokerage firm issue four stock certificates, each for a single share. If the brokerage won't issue the certificates in the name of the other individuals, each share would have to then be transferred to the others using the instructions provided by the stock's transfer agent.

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