Thursday, July 20, 2017

Should You Hold Physical Stock Certificates? (DRiP Investing)

Holding physical stock certificates is not necessarily safer or more convenient than having them in "book" form.

I mentioned before that "back in the day" my Mother used to buy stocks and keep the certificates in her safe deposit box, and reinvest the dividends.  She told me two things, which were among the plethora of things that she told me that I found out were dead wrong, or at the very least, sadly outdated, and that was to hold physical stock certificates and reinvest dividends.

Are these bad ideas?   Maybe in her day they made sense.  Today, less so or not at all.

As I noted in an early posting, one way I got started investing was by subscribing to The Money Paper.  Back then, we didn't have your fancy-schamcy Internets to do business on.  So you got this physical newspaper in the mail, and one thing they allowed you to do was buy one share of stock in a select list of companies that allow for shareholder investment.  They charged I think, a flat fee service charge to buy this one share, which you received in the mail.   I would frame these and put them around my home office - it was a good way of encouraging myself in the investment process.   Kind of impressive, too - let's face it, we all seek status!

But what this allowed you to do was DRiP investing - the Dividend Reinvestment Plan - that many companies offer to their shareholders.   Once you own that one share of stock, you can then buy additional shares for a nominal service charge.   You can set it up so every month you automatically buy $50 or $100 of ACME stock, and they would charge you a $1 service fee.   And dividends would be automatically re-invested over time.

Now bear in mind this was years before E*Trade and Ameritrade and low-fee or no-fee investing.   Back in the bad old days, you had to go to a licensed broker and pay like $30 a trade or more!   And I am not talking about 1930, but 1990.   Times have changed - rather rapidly.

Now, not all companies do DRiP investing, and some require you own more than one share to be a DRiP investor, for example 50 or even 100 shares.   The companies that do DRiP investing tend to be old line blue-chip dividend paying companies, not your stupid dumb-ass IPO tech nonsense that the media says will make you rich (but does the opposite, of course).   This is not a vehicle to speculate in stocks or gamble in the market - it is a means for small investors to build up a stock portfolio over time.

As I have noted in other postings, one problem for the small investor - the 20-something starting out with nothing in the bank - is that an "investment advisor" will say, "Well, I can set you up with a mutual fund, if you have about $5000 to start with!"   But of course, when we are in our 20's we don't have $5000 lying around - or at least I known I didn't.

So, for example, I started out putting $100 a month into Stanley Tool Stock (Now Stanley Black & Decker).   It has been a pretty stable company over the years, cranking out dividends like clockwork and gradually increasing in price over time.   And the end of the year, I had $1200 invested, and maybe $1500 in stock, with dividend reinvestment and gains in stock price.   The next year, I added another stock, such as AT&T or whatever - another blue chip, old line dividend payer.   By the end of the next year, I had over $3000 in stocks.

What this allowed me to do was adjust my spending in order to invest.  The big mistake I see people make (and I did it myself, once) is to sign up for the maximum 401(k) allotment, or make some big splashy investment, without figuring out where the money is coming from first.   A hundred dollars a month isn't going to materialize out of thin air, just because you decided to "invest".   You have to take that money from somewhere else in your budget.   Cut the cable bill, or maybe fewer of those $29 family meals from Chik-Fil-A.   Saving money is a lot more fun when the sacrifices you make are directly connected to doing something good for yourself.

If you don't figure out where the money is coming from, well, you can end up in deep trouble.   You'll start using credit cards to make ends meet, and well, we know where that ends up - your own personal credit card crises.   Going into debt while investing is idiotic.

Getting back to stocks, over the years, companies have moved their DRiP programs online and farmed them out to companies like Computershare.   Computershare operates these DRiP programs and also allows you to buy stocks through their website.   You can set up an account and have money debited from your checking account and used to buy shares periodically.  There are small fees for this, of course, but often far less than other online platforms.

Yes, I get free trades with Merrill Edge, but you have to have a minimum balance of $100,000 or so, and like I said, I didn't have that when I started out at zero.

So today, the need to have physical shares in your possession is unnecessary, even for DRiP investors.   And I found out the hard way, it can be a pain in the ass as well.   I had 70 shares of Stanley stock in my office and somehow it got lost when we moved.   This is not a good thing.   Of course, you can get your shares back, by signing an affidavit and paying a fee - which came to about $150.   It is sort of like if you lost a physical savings bond.   You don't have to worry about losing your investment, but it can be a pain in the ass to get it back.

Most stock holdings today are kept in "book" form - that is to say on the books of the company you have invested in.   So there is no need for physical shares to be issued and for you to keep them.   In fact, I suspect that physical stock shares will go the way of the buggy-whip in due course, if it has not already.   And that would be too bad, as they were often real works of art and kind of cool to look at.

DRiP investing is still around, and while I would not suggest you put all your eggs in this one basket (or indeed any basket) as your 401(k) and IRA are often better options, it is a good way to build up an after-tax portfolio which you will need as a buffer against possible downturns in life (layoffs, unexpected bills, etc.).   It is also a good way to get you to think about your portfolio, investing, and where your life is going.   When I started DRiP investing, I started tracking my net worth, and that made a huge difference in my finances, over time.

Getting back to the second thing my mother said that was wrong - should you reinvest dividends?   Back in the day, this made sense, as it was a very low-cost way to buy shares.  Your dividends were used to buy shares (or fractional shares) of stock for a nominal fee.   And when you are starting out, maybe this is a good thing do to to build your portfolio.   But once you have a large enough portfolio to generate hundreds of dollars of dividends a year (or more) it makes more sense to me, in this day and age, to take these as cash, in your trading account, and when the amount gets large enough (over $1000) use the money to buy another stock - thus diversifying your portfolio.

Again, my Mother's advice was not so much wrong as it was outdated.   If she wanted to diversify her portfolio, the stockbroker fees and transaction costs were very, very steep.  It was less costly to reinvest dividends, even if it meant that she had all her eggs in one basket, or at the very least, a small number of baskets.   With low-fee or no-fee trading today,  you can create your own "stock fund" with dozens of stocks, and not a lot invested in any one stock.   My stock account has more than 30 stocks, and no single one having a value more than $5000.  One stock crashing isn't going to take me out.

Today, I still have many of the stocks that I bought while DRiP investing - but I have them in a no-fee trade Merrill Edge account instead.    The $100 a month I put into various shares is now worth over $100,000.   And over the years, I have cashed in some of those stocks when I needed money for various reasons.   Financially, I came out ahead (as opposed to, say, putting $100 a month into cable TV) and psychologically as well.   When you have money in the bank, it helps with your mental health and well-being, that goes without saying.