I am a retired man with a 2-year-old great-grandson whom I want to do something for. Not being an active trader, I am torn between a mutual fund and stock in one of the old-line companies with a reinvestment program. Any suggestions would be appreciated. -- Bill Munson
As always, your decision should be based on what your goal is for this money.
If you are investing this money to fund your great-grandson's future college expenses, a mutual fund might be the way to go. With a mutual fund, you will get immediate diversification across dozens, if not hundreds, of stocks.
By buying a single stock or a even a handful, you may not get the same kind of broad exposure. But that doesn't mean it is the wrong decision. You may want to use the purchase of a single stock to educate your great-grandson and teach him lessons about the market.
If you decide to buy a stock or two for him, you can go to a broker (preferably a discount one) to buy shares, but you mentioned companies with reinvestment programs.
These dividend-reinvestment plans, or DRIPs, allow investors who own at least one share of stock in a company to automatically reinvest cash dividends, thereby accumulating more stock without using a broker. Many DRIPs also allow investors to purchase their initial shares directly from the company and to invest additional cash.
One of the primary attractions of a direct-purchase plan might be the very small investment minimums, says Charles Carlson, editor of the
DRIP Investor Newsletter
. To open a brokerage account, you might have to cough up $1,000 or more as the initial deposit. But with some direct-purchase plans, the investment minimums can be as little as $10. With
direct-purchase plan, for example, you need one share of stock to get started (roughly $66 at yesterday's close), but for additional purchases, there is only a $10 minimum. "You can buy both full and fractional shares in these programs," adds Carlson. Also, with these low investment minimums, the child will be able to make his own investments as he ages.
As with everything, there are some drawbacks to these plans that you should consider. Record-keeping is one. With direct-purchase plans, you are dealing directly with the corporation in which you own stock. You, or the person overseeing the child's account, will have to keep track of all the statements received from the company. At the very least, you will get quarterly statements, a year-end statement and an annual report.
The task may be an onerous one, particularly when you are looking at the many years ahead for this 2-year-old. (Just imagine the paperwork if you invest in multiple direct-purchase plans.) If the company spins off part of itself or splits its stock, the record-keeping may become even more unwieldy.
Every time there is a reinvestment of a dividend or the purchase of additional shares, it will change your cost basis. You will have to keep track of these "transactions" in order to know what your great-grandchild will owe in capital gains taxes if he ever sells the shares. Plus, the dividends are taxable.
When considering direct-purchase plans, you also should take a look at their fees. To buy the first shares, you might pay $5 to $15 dollars, and most plans charge fees per transaction that may run $1 to $5, says Carlson. The plans still may be cheaper than using a discount broker, but you may decide that the convenience of a single statement is worth the extra bucks.
If you are investing this money for your great-grandson's education and future, a mutual fund may be your best option. He winds up owning myriad stocks through a single investment. If you do decide to buy individual stocks, you may find it is a lot easier to house the account with a broker, which will keep track of the cost basis for you.
For more on direct-purchase plans, visit Carlson's site at
www.dripinvestor.com. You also should take a look at
www.netstockdirect.com. Both offer reams of information on the plans.
When making investments for a child, you should also read a
column on the subject by contributing editor
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