My 1st Million At 33 – yes, you can do it too

As a guest writer, 2million blogs his personal finance from 2millionblog.com, and is recording his journey to financial freedom. Please check him out at his site for more goodies.
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How to make sure you are picking the right plan for your long term stock investment

Ok so you have done your homework and you are ready to make a long term investment. Now that you have spent all this time picking the perfect stock the work is done right? Well if you are considering holding a dividend paying stock long term, you are probably considering the company sponsored DRIP as a plan to make your investment in. But there is also ShareBuilder who now has a pretty compelling alternative. You should carefully consider each plan, because the fee structure of the plan can have a significant impact on the total return for a long term investment (see the section about fees in this article to understand why). I have put together some material to help make sure you find the plan that saves you the most money.

(Note: A primer on DRIPs if you need it)

Here is a checklist of items to go through to help understand if a company sponsored DRIP or a ShareBuilder account is the best plan for your needs. If you are considering starting an investment through a DRIP or ShareBuilder – this may be helpful.

1) What will your investment frequency be? Will you follow a strict dollar cost averaging approach such a fixed monthly investment amount in the stock or a more loose interpretation with a couple investments per year? The strict dollar cost averaging of just one or two stocks favors using the company sponsored DRIPs, however if there are several different investments involved, depending on the total DRIP fees, a ShareBuilder account (such as the “standard” plan may be less costly)

2) Will you be reinvesting your dividends? If so, ShareBuilder account have free dividend reinvestment, but not all company sponsored DRIPs do.

3) What’s the time horizon? The longer the time horizon, the more importance should be placed on dividend reinvestment fees as they may make up a more significant portion of your transactions. If this is the case, in general the more favorable the company sponsored DRIP plans become without dividend reinvestment fees.

4) What will be the magnitude of your total investment amount? The larger your investment/investments will be, the less a factor the plan fees will be vs benefits such as market timing transactions by the account.

Other things to consider:
-The plans fee structures, both ShareBuilder and company sponsored DRIPS can change at any time.
-If a company sponsored DRIP becomes a less favorable option in most cases you can have your stock issued to you in certificate form free of charge, unlike ShareBuilder and other brokerages. This will allow you to move it to another account somewhere without hefty fees.
-If you are investing in several stocks, ShareBuilder has “bundled” plans such as the “Standard” plan that reduce your monthly investment costs making them an even more attractive option in some cases.

Plan Comparison Table
I have also put together a table that breaks down whether it makes more sense to use a particular company sponsored DRIP or a ShareBuilder account.

I make no warranties about the accuracy of this information, but I hope it will be of use to many of you. If you would like to a DRIP added to this matrix, add a comment and I’ll see if I can continue to expand it.

To use this table, first determine the investment strategy (column) that most applies to you, then find the applicable stock (row) and you will see for that investment scenario whether the company sponsored DRIP or a ShareBuilder basic account would have the lesser fee structure for your investment strategy.

Scenario #1
Strict dollar cost averaging strategy with automatic recurring contributions, reinvesting dividends.
Scenario assumes 5 years period with initial investment $1000; invest $50 every month; reinvest all dividends.

Scenario #2
Buy and hold in lump sums, make contributions, but not necessarily on a regular basis. Scenario assumes 5 year period with initial investment of $1000; make $100 investments 3 times per yr; reinvest all dividends.

Scenario #3
Buy and hold in lump sums, make contributions, but not necessarily on a regular basis, but don’t reinvest dividends.
Scenario assumes 5 year period with initial investment of $1000; make $100 investments 3 times per yr; no dividends are reinvested.

List of company-sponsored DRIP fees and web sites used in comparison

I think this table is a great way to quickly get an idea which plan would be better for a given stock. I have quickly learned that several of the stocks (PG, MDT, and CVX) I have holdings in company-sponsored DRIPs in would save me money if I had them in a ShareBuilder basic account.

If you decide to open a ShareBuilder account, make sure you check out this opportunity for bonus money when you open an account.