By Vita Nelson, Editor and Publisher of Moneypaper’s Guide to Direct Investment Plans
Special to the Financial Independence Hub
You may not give much thought to the investment fees you pay. That’s because they seem so small. Right?
According to an October, 2014 survey by investment management firm Rebalance IRA, many Americans incorrectly believe they pay no fees in their retirement accounts. Among baby boomers between ages 50 and 68, all with full-time jobs, “forty-six per cent believed they paid nothing, and 19 per cent were under the impression that their fees totaled less than 0.5 per cent.” (In fact, research reveals that actual expenses average 1.5 per cent of their assets per year every year.)
Chances are that fees are costing you much more than you realize! Why?
Because the fee itself isn’t the real culprit. The real killer is the opportunity cost of not investing the money you’re spending on fees. That’s why John Bogle, founder of Vanguard, calls investment fees the “tyranny of compounding costs” in a recent Forbes interview.
The real cost of investment fees is the value of the shares you never bought, and how much those shares would have increased your wealth over the long term. That is, you’ve lost the compounding effect of owning those shares: the dividends that would have been paid to you on the shares and the compounding effect on those dividends.
A 1.5% typical management fee on your $100,000 portfolio will cost you $1,500 the first year, which (if invested at an 8% annual average return over a 25 year period) would have grown to $18,388. And that’s just the first year! Management fees cost you every year.
Assuming an 8% annual growth rate (based on Morningstar’s 10-year average annual return of the S&P of 8.12%), dividend reinvestment, and an annual dividend increase of 6% (rounded-up from S&P research of 5.7%), your portfolio grows to $1,255,500 in 30 years. That’s great!
But it pales in comparison with what your $100,000 would have grown to had you not paid fees. Your $100,000 grows to $1,965,465, an additional $709,965. Nearly three quarters of a million dollars MORE!
Take a look:
Now you see why financial advisers make out so well. The cost of their fees over the term of your investment is likely to cost you hundreds of thousands of dollars! Presumably, those fees that you paid end up compounding in their accounts!
Fees have an overwhelming impact on long-term returns
The reality is that the nature of compounding means that fees matter. In fact, they have an overwhelming effect on your long-term results.
What you may not know is that you can completely bypass fees and invest directly in many top-rated U.S. companies.
Companies like Johnson & Johnson (JNJ), 3M Corp (MMM), AFLAC (AFL), Exxon Mobil Corporation (XOM), Hormel Foods Corp. (HRL), Northrup Grumman (NOC) and Kellogg (K), are among the hundreds of blue-chip dividend paying companies that sell shares directly to individual investors through their Direct Investing Plan or Dividend Reinvestment Plan (DRIP).
DRIPs have actually been around since the 1960s. That’s when the SEC approved their establishment—and when some of America’s finest companies created DRIPs for their employees and made the option available to individual investors.
Wall Street’s best-kept secret
But the SEC attached a stipulation: Companies can offer these plans, but they can’t advertise their existence.
So they’ve remained Wall Street’s best-kept secret: your broker has no incentive to tell you about them and miss out on the commissions you pay him to trade for you.
In short, while you can vastly improve your investing results by investing what you would have otherwise lost in fees, there’s no financial reason for anyone to tell you about this commission-free investing option.
DRIP Stocks Performed Better Than Other Market Indices Historically…
DRIP companies tend to have an edge on the market in general. We proved that with the results of the MP 63, our index of 63 DRIP companies, which was organized in 1994.
Note: MP 63 (DRIP Index) includes reinvestment of dividends, while the other indices do not.
Had you invested $5,000 in an index mirroring the S&P in 1994, you’d have $22,350 today. Not bad.
But had you invested that same $5,000 in an index made up of the 63 companies in the MP63 Index, your $5,000 would have grown to $55,040 during the same period. More than twice as much!
There are reasons for this outperformance. One reason is that the policy of efficient, well-managed companies is to act in the interests of their shareholders, large and small alike. A good way to achieve that goal is to provide shareholders with the direct investing option, and encourage them to participate.
And when investors support a company by acquiring stock regularly, they also tend to be devoted buyers of its products and services. Companies love that kind of loyalty. A faithful customer base in turn helps support the price of the stock, creating a “virtuous circle” that benefits everyone.
Diversification made easy with DRIP investing
Because you can open a DRIP account with a single share of stock, you can become an owner of lots of different companies, creating a portfolio with representation in a wide variety of industries.
Nearly 700 companies offer No-Fee DRIPs. There are plenty of choices in each sector. You could set up a portfolio with your own personal favorites, but never pay fees to invest. In doing so, you are in a sense, creating your own mutual fund: where only you benefit.
For example, you might choose to in invest in the No-Fee DRIP of …
⇒ Oil giant, Exxon Mobil Corporation (XOM), a solid energy sector stock
⇒ Pharmaceutical giant Abbott Labs (ABT)
⇒ Healthcare product manufacturer, Johnson & Johnson (JNJ)
⇒ Insurer AFLAC (AFL) in the financial sector
⇒ Dow Chemical (DOW), a solid industrial stock
⇒ Consumer food manufacturer Hormel Foods Corp. (HRL)
⇒ Utility giant, MDU Resources (MDU), a diversified natural resource company
⇒ Cracker Barrel (CBRL), a family favorite food retail establishment
⇒ Telecom leader, CenturyLink (CTL)
⇒ Union Pacific (UNP), an outstanding transport company
⇒ Raytheon (RTN) specializing in aerospace and defense
When you enroll in a DRIP, the company registers the shares in your name and sends regular statements directly to you rather than the ‘street name’ of a broker. You maintain complete ownership and control of your shares at all times.
As always, good luck!
Vita Nelson is an acknowledged authority on the operations of company-sponsored direct investment plans (DRIPs), educating investors since 1981 on this often-overlooked investing option. Ms. Nelson provides financial information centered around DRIP investing at www.directinvesting.com.
Click here for a list of Dividend Reinvestment Plans (DRIPs) that do not charge fees for investing, or reinvesting dividends.