DRIPs Don't Hold Much Water for Most Investors

First of all, 63 companies is still a fairly concentrated portfolio. And since all are in the S&P 500, why not just buy an index fund? Most funds automatically reinvest any dividends as well.

"Products like this that promote adherence to a buy-and-hold strategy are generally positive," says Morningstar analyst Kunal Kapoor. "But an index fund would compare more favorably, so if you can get a S&P 500 index fund, why wouldn't you do that?"

Indeed -- especially once you've looked at the numbers. The yield on the DRIP fund is 0.7%. The yield on (VFINX Quote - Cramer on VFINX - Stock Picks)Vanguard's S&P 500 index is 1.52%. That's a pretty big difference.

Another significant difference can be found in the fees -- while 1.25% may not be out of line for an actively managed fund, it's quite high for an index fund. The expense ratio on Vanguard's S&P 500 index is 0.18%.

Now, the DRIP fund is tiny -- just $22 million in assets -- and Fish acknowledges that that keeps the fees slightly on the high side. "Once we hit $25 million, we'll see a reasonable drop-off in the fees [that are charged by the administrator]," Fish says. "We've already switched administrators to lower fees."

The fund also only buys into inexpensive DRIPs, and has kicked out companies that institute higher cost plans.

But while the intent may be genuine, most investors would still do best elsewhere -- whether they're looking to capitalize on the new lower tax rate on dividends or simply have a more organized portfolio.

"There's so much product created to take advantage of investor ignorance," says Larry Swedroe, director of research for Buckingham Asset Management. "I don't see the value in any of these kinds of products. Buy an S&P index fund."

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