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DRIPs Get a Makeover for the Web Era

Once the burdensome paperwork is eliminated, dividend reinvestment plans can make a lot of sense.

It's easy to dismiss critics of online trading as self-serving defenders of an elitist, high-commission status quo. That's what most of them are, after all.

But having an agenda doesn't automatically make them wrong. On one count, at least, they have a pretty good point: By making stock trading a 10-second, $20 proposition,

E*Trade

(EGRP)

,

DLJdirect

(DIR)

and their kin have tempted far too many investors to think and act like traders, buying and selling after a few points' move, trying to time the ups and downs of their favorite stocks and/or market indices.

This is fun, in the way that betting on sports is fun. But it's not how you make money in the long run. For reasons of human psychology and market structure and given the sheer unpredictability of the future,

you cannot consistently time either markets or stocks

. You just can't.

So despite the sense of omnipotence that comes with instant execution and $7.95 trades, the best way for most of us to actually build capital is still the old-fashioned way: a little at a time over very long periods, selling infrequently and otherwise getting on with life. And the winning strategies remain those stone tools and sharpened sticks of the pre-Web era, dollar-cost averaging, index funds and -- gasp -- dividend reinvestment plans. (Wait, don't go yet. This story has a high-tech twist, I promise.)

Index funds you already understand (if not, spend half an hour at

www.vanguard.com). Suffice it to say that people who bought an

S&P 500

index fund a decade ago are sitting on an average annual gain of 18.5%, something most professional money managers can't touch.

You probably haven't heard much lately about dividend reinvestment plans, or DRIPs, in which owners of a company's stock instruct the company to convert future dividends into more stock. Most DRIPs will also accept optional cash payments (buying fractional shares with whatever odd amount is left over). And they'll do the automatic withdrawal thing, pulling $25 or $50 each month from your bank account.

But traditional DRIPs are such a pain in the butt that only those with insufficient cash for a brokerage account and/or an unnatural tolerance for complexity really like them. For instance, most DRIPs still require you to buy the first share through a broker, then ask the broker to reregister the shares in your name and mail you the certificate.

Even the growing number of direct-purchase plans, which let you buy the first share from the company, still require you to fill out and mail application forms. Like I said, Stone Age, cave man, not worth it.

Now the Web is doing for DRIPs what it did for stock trading -- making it simple, cheap and, as a result, interesting for the average wired investor.

Log on to

Netstock Direct

(

www.netstockdirect.com), for instance, and you can sample the wisdom of Chuck Carlson, Doug Gerlach and several other DRIP authorities, along with up-to-date stats on all the major DRIPs. And for a growing number of DRIPs (currently 250, including big names like

IBM

(IBM) - Get International Business Machines (IBM) Report

,

TheStreet Recommends

General Electric

(GE) - Get General Electric Company (GE) Report

and

Wal-Mart

(WMT) - Get Walmart Inc. Report

) you can enroll onsite and have funds transferred from your bank account. Choose the automatic withdrawal option, and more cash will flow from bank to DRIP each month, sans envelopes, stamps and brokerage commissions.

The service is free to customers because it's so cheap for companies, says Jeff Seely, Netstock Direct's president. "It costs a company between 35 and 50 bucks

to land one DRIP investor. We charge

companies way less." (Be aware, though, that DRIPs themselves can charge all kinds of fees. To find the friendliest plans, read Netstock's resident experts, or visit

www.moneypaper.com.)

Recently Netstock added mutual funds to its menu. Four families --

Credit Suisse

,

Invesco

,

Safeco

and

Stein Roe

-- have agreed to offer their funds directly through the site for free with the same ease of application.

Some details, however, remain to be worked out. Users still get separate monthly statements for each DRIP they buy. And Netstock can't yet offer an account status page that shows portfolio activity and balances in real time. "We'll get there," says Seely. "There are so many different plans and transfer agents -- we're trying to create the standard they can all report to."

This might take some time (which in cyberspace can mean anything from weeks to a few months), but when it happens, investors will have access to a sort of mirror image online trading account. Where E*Trade lets you move in and out at will, Netstock Direct will encourage you to move in slowly and stick around for years.

When bought online, DRIPs are almost as simple as index funds but more fun because they're stocks. And because they let you buy fractional shares, they're better for dollar-cost averaging than stocks bought through

Schwab

or DLJdirect. Think of it as online trading without the temptations. Or as a chance to become a mini-

Warren Buffett

, buying into good stocks over long periods of time, with the goal of holding them forever.

John Rubino, a former equity and bond analyst, writes a column on mutual funds for POV and is a frequent contributor to Individual Investor, Your Money and Consumers Digest. His first book, Main Street, Not Wall Street, was published by William Morrow in 1998. At time of publication, he had no position in any stocks mentioned. While Rubino cannot provide investment advice or recommendations, he invites your feedback at

rubinoja@yahoo.com.