Building a Portfolio, DRIP by DRIP

Question of the week:I want to invest $100 every month in a certain company. I heard that you can buy stocks in dollar amounts instead of blocks of shares. Is that true? --CP in Springfield, IL

Dear CP,

You're talking about investing through Dividend Reinvestment Plans (known as a "DRIPs"), which are plans that let you buy stock directly from the company, without having to go through a broker. These plans let you buy fractional shares of stock, so that you can invest in small amounts at a time (with some plans, as little as $10). If you choose, you can have your dividends automatically used to buy additional shares. At last count, there were over 1,600 companies that offer DRIP plans.

DRIP investing carries some very appealing benefits. Here is what some members of the Armchair Millionaire community said recently about why they use DRIPs:

Dollar cost averaging. "The convenience of monthly deductions from my checking account has made it a very easy and cost effective to build a position in several stocks." --FS

Dividend reinvestment. "I purchased just a few shares in one company in 1996. Thanks to reinvested dividends, I've doubled my money in the last six years." --Jim S.

Low costs. "I combine DRIP investing with low cost online services. With this combination, you exercise one of the powerful secrets of wealth building: keeping your expenses low!" --Doo

Convenience, no broker commissions, the ability to dollar cost average, and automatically reinvesting your dividends--all of these features add up to make DRIPs quite attractive to the long-term investor interested in building a nice portfolio of stocks. If you decide to take the DRIP plunge, my quick guide will help get you started.

The Armchair Millionaire Guide to DRIPs

• Your first purchase. Some companies require you to already own at least one share of their stock in order to enroll in their DRIPs. You'll need to make this initial purchase elsewhere, such as through a broker. Other companies have eliminated this burdensome step however, by offering Direct Stock Plans (DSP) that let you make that first purchase directly through their plans.

• Dividend reinvestment. While most plans allow you to automatically reinvest dividends, some do not. Of those that do allow dividend reinvestment, some require you to reinvest all of the dividends, while others will let you reinvest a portion of the dividends and receive the rest as income.

• Buying more. Most plans allow you to buy additional shares (called "optional cash purchases") on a regular basis, such as monthly or quarterly. You can usually arrange for automatic purchases, with the money drawn directly from your checking account.

• Costs. Many DRIP plans charge fees, including charges for additional purchases of stock and charges for automatically reinvesting your dividends. Most of these are flat fees (like $5.00), so you'll pay the same regardless of the size of your purchase. Keep in mind that this can significantly reduce your overall return if you're just making small dollar purchases.

• Selling. Most DRIPs let you sell your stock directly from the plan. While it's still much cheaper to sell this way than through a broker, make sure you should know in advance about any fees charged for selling.

• Getting started. Perhaps the easiest place to research DRIP stocks and enroll in DRIP plans can be found on the Web at www.netstockdirect.com.

THE BOTTOM LINE: After you've found a stock you like for the long haul, find out if they offer a DRIP. For investors who want to take direct charge of their portfolios, DRIP investing offers the best of all worlds: low costs, easy additional investments on a regular basis and the power of compounding returns.