DRIPs Don't Hold Much Water for Most Investors

Beware of new ideas from the mutual fund industry.

Whichever way the market shifts, there's a new product designed just to take advantage of it. Bear funds, principal protection funds, you name it. Now, enter the DRIP fund.

Dividend reinvestment plans, or DRIPs, allow investors to accumulate shares in a company over time by automatically reinvesting their dividends. Many companies offer no- or low-fee DRIPs, some companies also discount the stock price. The premise is sound -- investors are encouraged to hold onto stocks for the long term, and dollar-cost-average all new shares purchased.

So a fund consisting entirely of DRIPs should make sense, right?

Not quite.

The idea isn't a terrible one in principle, and the creators of DRIPXMP 63 certainly aren't quite as mercenary as, say, some investment banks or larger fund companies looking to prey on investor fears with get-rich-quick products. The fund, launched by the backers of Moneypaper, an investor education newsletter that promotes DRIP investing. Moneypaper, edited by Vita Nelson (who co-manages MP 63 with David Fish), launched a fund based on its 63-company index (hence the name of the fund) in 1999.

"The index, and consequently, the fund, is composed of a diverse mix of industry leaders," Fish says. "And one of the greatest strengths of these companies is that two-thirds of them have raised their dividend annually for at least 10 years. Some -- like Colgate-Palmolive CL, Coke KO and Johnson & Johnson JNJ -- have increased their dividends every year for 41 years."

The fund's fees are in line with the average -- 1.25% -- and it carries a redemption fee of 2% for sales within three years, 1% for sales within five years.

But while redemption fees discourage short-term investors -- a noble intent -- and the management fees meet the industry average, the fund still may not make much sense for most investors.