Replanting Dividends: It's Easy And Cheap

When money seems tight, it's easy to put investing on the back burner. But there's a relatively painless way for owners of dividend-paying stocks to beef up their holdings. More than 700 companies let shareholders automatically reinvest dividends into more stock. Usually, that lets you bypass a brokerage fee. And some companies even give a discount on the stock itself.

Such dividend reinvestment plans (DRPs) employ a time-honored investment technique: dollar-cost averaging. By investing a fixed amount at regular intervals, you buy fewer shares when the stock price is high and more when the price is lower. A $500 investment, for example, would buy 10 shares if a stock was at $50, and 20 shares if it fell to $25. Over time, that results in an average price to you that's lower than the stock's average market price.

Banks and electric utilities dominate DRP rosters. A few foreign companies with American Depositary Receipts (ADRs), which represent shares of foreign companies traded in the U.S., offer DRPs as well, including SmithKline Beecham and British Petroleum. Most companies don't charge administrative fees for the plans, so the entire dividend check goes toward more shares.

TAXABLE. Even better, about 100 companies offer a discount, usually 3% or 5%, for shares bought with reinvested dividends. You can find a list in S&P's Directory of Dividend Reinvestment Plans ($70 for two issues; $39.95 for one; 800-777-4858). Evergreen Enterprises has a $28.95 guide (P.O. Box 763, Laurel, Md., 20725-0763).

Investors usually have to own at least one share of stock to enroll in a DRP. If you agree to have dividends reinvested, however, some companies, such as Bank of New York, Minnesota Power & Light, and Texaco, will sell you your first shares directly, up to a set dollar amount. You may also invest additional cash at set periods. Selling plan shares involves a small fee, often about 1%.

Keeping track of your DRP shares is important. Even though you haven't seen your dividends, you must enter them as income on your tax return. And while you may escape a broker's fee you won't be able to give Uncle Sam the slip: You will be taxed on the difference between any discounted price and the shares' fair-market value.

      Company    Stock  Reinvestment
                 price*     discount
                    21 3/4    3%
                    23 3/4    3
                    20 3/4    5
      POWER         29 3/4    5
      *As of Feb. 11