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Many investors count on the power of dividends to help them turn modest investments into long-term wealth. By reinvesting dividends to buy more shares, investors can compound their returns on a successful stock, and over the long haul, you can end up with far more shares than you started if you use dividend reinvestment. Many companies have implemented dividend reinvestment plans, or Drips for short, to help their shareholders in implementing this strategy. Some even offer these plans at no cost, absorbing expenses to the benefit of their investors. However, other companies take the opportunity to charge fees to would-be shareholders, and that can have a negative impact on the value of a Drip investing strategy. Below, we'll look at three popular companies that have high fees in their dividend reinvestment plans that could put them among the worst Drip stocks in the market.
Fast-food giant McDonald's (NYSE: MCD) is a popular Drip choice, and the fact that children have direct experience with the restaurant chain from an early age makes it especially attractive as a first investment option for parents looking to teach their kids about investing. However, if you intend to use the Drip as a way of building a position in the stock, you need to be aware of some of the fees involved.
Like most companies, McDonald's requires you either to already own shares or make an up-front investment. In the fast-food company's case, an existing minimum holding of 10 shares or an investment of $500 is required. If you don't have $500 up front, you can authorize automatic ongoing investments of at least $50 per transaction. Custodial accounts require smaller minimums, with ownership of one share, a $100 minimum investment, or ongoing $50 transactions.
McDonald's charges a $5 initial enrollment fee to join the Drip, which isn't entirely unusual, although some companies waive such fees. But to make additional purchases, you'll pay $5 plus a nickel per share for optional investments, or $2.50 plus a nickel per share for automatic ongoing investments. In addition, every time you get a dividend, McDonald's will keep 5% of the payment, up to a maximum of $2. That might not sound like much, but when you're just starting out, having a portion of your dividends taken away can add up over time to a more substantial hit.
You'll also pay fees when you sell. If you agree to batch processing for your sale, you'll pay $15 plus $0.12 per share. A higher $25 fee applies to an on-demand sell order, with the same per-share charge. All in all, these fees reduce the attractiveness of McDonald's Drip.
You'll find similar fees at Ford Motor's (NYSE: F) dividend reinvestment plan. An initial setup fee of $10 applies to new participants, with a minimum initial investment of $500 that can be paid in 10 monthly installments of $50 automatically deducted from a bank account. You'll also pay $0.03 per share for initial purchases under the plan. Subsequent investments cost $5 plus $0.03 per share unless you automatically deduct them from a bank account, in which the fee is reduced to $1 plus $0.03 per share.
To reinvest dividends, Ford can end up charging more than McDonald's. The same 5% charge applies, but the maximum is higher at $5, plus a $0.03-per-share fee. Similar sales fees of $15 to $25 plus $0.12 per share also make selling costly as well.
Telecom AT&T (NYSE: T) also makes the list, with Drip provisions that are similar to the two above. The phone giant charges a $10 initial setup fee and requires a minimum of $500 or monthly installments of $50. Subsequent purchases cost $5 for most transactions or $2.50 through automatic investment, and AT&T tacks on a nickel-per-share processing fee on top of that.
To reinvest dividends, AT&T charges 5% up to a $3 maximum. It also adds a $0.10-per-share processing fee, doubling its usual per-share purchase fee. That acts as an odd deterrent for dividend reinvestment. Sales fees of $10 to $20 plus $0.10 per share are slightly lower than its peers, but they still represent a barrier to exit when it comes time to take money out.
Dividend reinvestment plans should make it costless for loyal investors to take their dividend income and reinvest it in the company. Instead, these three companies take the opportunity to charge fees for the service. Given that many brokerage companies will let you reinvest dividends at no charge, these three Drips are unfortunate examples of how investing directly through a company won't always give you the experience you deserve.
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Dan Caplinger owns shares of Ford. The Motley Fool owns shares of and recommends Ford. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.