Small Investments, Big Money

Ray Martin Suggests How To Make A Mountain Out Of A Money Molehill

(CBS) 


Dividend Reinvestment Plans (DRIPs)
Minimum to Start: The price of one share
Minimum to Add: $10 to $50 per additional purchase
Where to Learn More: www.directinvesting.com

Dividend reinvestment plans are a way for people to buy stock directly from the company (usually through a transfer agent) in very small to large amounts, and usually on a monthly basis if desired. These plans get their name from the fact that they also allow shareholders to reinvest the dividends they receive from their shares, using these dividends to purchase more stock. Thus the name "Dividend Reinvestment Plan," or DRIPs.

DRIPs are offered by almost 1,000 companies — from AFLAC to Yahoo — and by using DRIPs, you can invest in a stock directly without a broker and often without any additional fees or commissions. And best of all, to start you only need enough money to buy one share of the stock.

DRIPs are a way to begin investing with a very small amount of money and to keep investing monthly (or as frequently as you can afford) in small amounts by and reinvesting dividends and making additional contributions, while avoiding brokerage commissions. In the long term, it's a great long-term way to grow money. You have dollar-cost averaging working for you and you're investing, ideally, in great companies that you don't foresee selling for a long time.

Of course, one downside of DRIPs is that you may end up investing in the stock of one company, and this can mean more risk than you are willing to take with your precious savings. So it's best to carefully choose the stock or stocks and look for stocks of mature or blue chip companies that pay above-average dividends to shareholders.

Direct Investment Plans
Minimum to Start: The price of one share
Minimum to Add: $10 per additional purchase
Where to Learn More: www.betterinvesting.mystockfund.com

Say you like the idea of DRIPs for saving and investing for long-term goals, but you would rather diversify your savings among a few investments — which, after all, is a smart thing to do. The challenge is that to have access to several stocks and stock mutual funds in one account, you often need a brokerage account or a mutual fund account. The problem is that these accounts typically require high minimum initial investments and come with high transaction fees each time you buy. One option is to use a Direct Investment Plan, which is a close cousin of DRIPs.

Direct Investment Plans are services provided to members of investment organizations — such as the National Association of Investors Corporation, or NAIC — where members can open an account and buy stocks and exchange traded funds with as little as $10 per additional purchase. The fees for these accounts are two fold: an annual membership fee of about $30 and a transaction fee of about $1 for each buy. Doing the math, say you want to invest in five individual stocks, or exchange traded funds each month, the transaction cost of each purchase would be about $3.50 — which is a lot less than the $75 transaction cost to buy one mutual fund at a popular discount brokerage firm!

Hint: See the below for my recommendation of the five exchange traded funds to consider for a well diversified portfolio:

iShares Lehman TIPS Bond: TIPS
iShares Russell 3000 Index: IWV
iShares S&P MidCap 400 Index: IJH
iShares S&P SmallCap 600: IJR
iShares MSCI EAFE Index: EFA

Check out the mystockfund account Direct Invest Plan offered on www.betterinvesting.org to learn more.

Mutual Funds
Minimum to Start: $0 to $1,000
Minimum to Add: $50 to $100
Where to Learn More: www.troweprice.com and www.vanguard.com

You can invest as little as $50 per month in any mutual fund offered by T. Rowe Price through automatic deductions from your bank accounts, or by authorizing deductions to be made from your paycheck or Social Security check. Minimum initial investments are waived when you open an account with this service. T. Rowe Price offers a family of more than 80 no-load mutual funds.

If I were asked to recommend just one single mutual for starter-investors, that would have to be the Vanguard STAR fund (VGSTX). The Vanguard STAR fund is a fund-of-funds that invests in 11 of Vanguards most well-known stock and bond funds, thus providing a diversified portfolio all in one low cost mutual fund. This fund is offered directly through Vanguard, and you'll have to come up with at least $1,000 to start with, and you can make additional investments with as little as $100.

U.S. Savings Bonds
Minimum to Start: $25
Minimum to Add: $25
Where to Learn More: www.treasurydirect.gov

With as little as $25 you can buy U.S. Savings bonds through payroll deduction from your employer into a TreasuryDirect account. These bonds are guaranteed by the U.S. government so they are very safe. Of course, along with safety comes a stable but lower rate of interest — currently in the 3 to 4 percent range for these bonds purchased in 2006. One good feature is that the interest paid on the bonds is exempt from state and local taxes and you typically do not include the interest in your federal taxable income until you cash the bonds in.