DRIPs or Index Fund?

[tagrims]

Which is a better long-term investment a stock with a DRIP or an index fund that doesn't pay a dividend?

I am a teacher and will have a pension through my state when I retire (20+ years away)

I am at a loss between putting money into:

Bank of America (BAC 2/10 price at $43.92 per share, annual dividend yield of 4.55%, quarterly dividend 50cents a share.)


or Vanguard's Total Stock Index (VTSMX, $3000 min investment, .19% expense ratio)


I feel like BAC is a bigger risk but seems to have a good return (stock price goes up increasing value and also the dividend is buying more shares)



Which would you people invest in (if you could only choose one?)

[pyotr]

if you're looking at 20yrs, you can't go wrong with the Vanguard index fund. If you buy the BoA stock, it is higher risk inherrently because it's just one company. The benefit of buying old established slow growth companies might be stock price relative stability and dividends, but the benefits of buying smaller, growth stocks in the absence of dividends are the superior growth potential. I wouldn't let dividends make the deciding differnce in whether you buy or sell a stock.

[Ima saver]

I would go with the Vanguard Index fund also. I did both, drips and vanguard index and I think that I have done better with the Index fund.

[kristinecfp]

Originally Posted by tagrims

Which is a better long-term investment a stock with a DRIP or an index fund that doesn't pay a dividend?

Just an fyi - index funds do pay dividends. The dividends will depend on the stocks that make up the index fund. VTSMX paid dividends every quarter in 2005. See Yahoo or Morningstar to check the divs out.

Both DRIPs and index funds are good investments; which is better just depends on your goals for the investment. My personal preference is index funds because of the diversity, professional management, low expenses, etc. Vanguard, T. Rowe Price, Fidelity are all good resources for index funds. I like DRIPs for children because it's a great way to teach them about investing, and because they are usually in a lower tax bracket (DRIPs can be quite a tax headache).

Good luck...

[baselle]

Originally Posted by tagrims

Which is a better long-term investment a stock with a DRIP or an index fund that doesn't pay a dividend?

Which would you people invest in (if you could only choose one?)

Why would you choose only one?

I have both DRPs and index funds. Most of my money (95%) is in index funds. I have several DRPs also, started directly through the companies involved, without Sharebuilder. No fees that way, and its fun and gets me to read the financial pages. I consider myself a hobbyist here though.

I'm a bit concerned that you want to put all your money in just one company. Yep, its a big bank, but how much do you know/want to know about BofA's business and the banking business in general? I'd be much more comfortable if you wanted to put a minimal amount of money into several DRPs and add small amounts to it each month.

[sweeps]

What are the transaction fees you folks are paying on your DRPs? I used to own about 20 shares of a particularly company's stock (given to me as a gift). The dividends were set up to be reinvested. Each quarter my dividend was about $3, but the DRP transaction fee was $1.50. So I ended up losing half of my dividends in fees.

[Ima saver]

Wal mart does not charge transaction fees but Home depot and Wendy's does. Home depot's was less than $2 and Wendy's was less than 50 cents.

[baselle]

Originally Posted by Sweepsplayer

What are the transaction fees you folks are paying on your DRPs? I used to own about 20 shares of a particularly company's stock (given to me as a gift). The dividends were set up to be reinvested. Each quarter my dividend was about $3, but the DRP transaction fee was $1.50. So I ended up losing half of my dividends in fees.

3M (MMM) doesn't charge fees and nor does Coke (KO) if you use paper - 1$ if you transfer electronically, grrr - or Wisconsin Energy (WEC). Actually, I've mispoke. MMM charges a fee (.50) but then pays it for you, which you pay taxes on. lol.

Direct Investing http://www.directinvesting.com/ has a pretty good resource if you want to research possible Drips. Just search using the companies ticker symbol. As you have figured, there are good, bad and ugly Drips.

[tagrims]

For the Vanguard Total Stock fund do the dividends reinvest automatically?

What if your divdend amount does not = a full share?

Or do they just send you a check with the dividend amount?

[sweeps]

Typically you'll have the dividends reinvested (yes, this will often leave you with a partial share). But you can also have them send you the dividend.

[Ima saver]

i always sign up to have my dividends reinvested. That way I have more shares.

[weiwentg]

Originally Posted by tagrims

For the Vanguard Total Stock fund do the dividends reinvest automatically?

What if your divdend amount does not = a full share?

Or do they just send you a check with the dividend amount?

you would usually specify with the fund company or the supermarket if you want your dividends and capital gains reinvested or taken in cash. with mutual funds, you typically own fractional shares.

[Kirby]

I think doing a DRIP program off of an index fund is a fantastic idea for you. You might also want to look into doing something similar with a few of the ETF's out there.

[sweeps]

Kirby, what is a "DRIP program off of an index fund"?

[Ima saver]

Do you mean reinvesting dividends?

[baselle]

Originally Posted by Kirby

I think doing a DRIP program off of an index fund is a fantastic idea for you. You might also want to look into doing something similar with a few of the ETF's out there.

Do you mean buying an ETF comprised entirely of dividend producing stocks and that you would reinvest the dividend back into the ETF?

[Russell]

Bringing this back up instead of starting a new thread.

How much of a pain are the dividend paying stocks/funds in terms of taxes (outside of Tax deferred/exempt accounts) ? Kristine mentioned they can be a headache but I always assumed you'd just get a 1099 or whatever from your broker (Scottrade etc) with all the calculations already done for you so it'll just be a matter of plugging in the numbers in TurboTax etc ?

[baselle]

The tax pain isn't in paying tax on the dividends every year - your assumption is right that you get 1099s from each transfer agent in January.

The tax pain comes when you sell your stocks. When you sell a round lot (100 shares) of lovingly saved up DRPs stocks of different values and fractions of a share - what's your cost basis? Calculating that is a pain.

At the very least, you have to save the end of year statements, so you know what you've bought, when you bought, and how much you've paid. Keeping track of your holdings via a spreadsheet is a must so you can do the calculations. (Fun fact: DRPs first became popular at the same time as Lotus 1-2-3). I also think that the IRS will let you average and estimate you holdings and I think you can select which stocks you considered that you've sold, but you'll have to double check that.

[Russell]

Thanks baselle, do you mind sharing what your spreadsheet looks like ? Would it look something like the attached pic ? Also, do you enter the data in your spreadsheet from the year end statements ?

I've been looking at directinvestments.com and thinking about buying a few DRIPS through them.

Thanks.

[baselle]

Russell - Screenshots aren't working for me tonight, and my spreadsheet's a bit more complicated. If you could email me at I'll send you a copy. If it helps, I modified it from the spreadsheet I found on this site:

http://dripinvesting.org/tools/dripspreadsheet.htm