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SmartMoney Magazine by Stephanie AuWerter (Author Archive)
Skip the DRIPs
— Theresa Komitas, DeKalb, Ill.
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ANSWER: That depends on why your parents are looking to move. While IRS rules state that homeowners who have not lived in their home for two of the past five years are subject to tax on their gains, you could drive a truck through the loopholes. If your parents are selling for health reasons, a job that's more than 50 miles away, or "unforeseen circumstances," they may be able to get a prorated exclusion on their tax bill. Unforeseen circumstances include divorce, having twins and losing one's job. If your parents have an unusual reason, they could seek a private letter ruling from the IRS, says principal tax analyst Mark Luscombe, of CCH, a tax-information publisher. (Reasons such as noisy neighbors have qualified.)
Of course, falling housing prices combined with home improvements, which increase the home's cost basis, thereby reducing the profit and, consequently, the tax on the sale, may mean there's no gain to shelter. Or the sluggish housing market may force your parents to limp over the two-year mark, in which case they can shield up to $500,000 in profit from capital gains taxes. Sadly, the days of the quick flip are over.
QUESTION: What is your take on dividend reinvestment plans (DRIPs)? I haven't heard much about them.
— Thomas Nguyen, Orlando
ANSWER: DRIPs allow investors to buy stock from a company directly, without a broker. You can get started with just a single share, and your dividends will be automatically reinvested to purchase more shares. The better plans also allow you to buy more shares outright, often with as little as $25. More than 1,200 companies, including Microsoft, Exxon Mobil and Caterpillar, offer these programs. (For a list, visit directinvesting.com.)
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Some of my most sucessful investments were made using DRIPS...Many DRIPS can be started even if you don't own any shares when you start.....BUT you do have to watch for fees....on the other hand, many DRIPS have no fees and in some cases issue the stock at a discount For the little guy you has small dollar amounts to invest, DRIPS are the way to go.
As far as mutual funds, I wish they gave me half the return that I get doing my own stock investing.....For all their fees and their poor returns, they are a loser. Further they all have the 'herd' mentality....Rememer 'Buy Internet stocks'?
My discount broker (Scottrade) does NOT re-invest dividends-that's how they keep their costs low. DRIPS are nice-I once had three. If I were investing in dividend-paying stocks now, I'd sure do it that way.
DRIP investing is outmoded at best. The records keeping and IRS reporting are onerous and time consuming. I started with DRIPs when brokerage fees were high. I spent untold hours maintaining records and working on my income tax returns just to report many simple small transactions. Today's low-fee brokerages are a god-send and the transaction is made when I want to buy or sell. The article is right on point.
DRIPS are good. I do not understand all the noise made about a plan's costs if they are reasonable. I know of at least three individuals who started DRIPs at an early age and I am told that they are now millionaires. How much money does one need once you reach this goal?
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Your answer to the question about DRIPs was way off base! You say that they made sense when brokerage commissions were high and then cite the example of buying 100 shares of Exxon for a $10 trade. When did $10 become less than ZERO?? Even worse, you seem to be missing the point entirely. DRIPs are ideal for someone that has $25, $50, or $100 to invest. Buying 100 shares of XOM would cost $9-10,000 and represent a LARGE commitment to one stock. For teh same cost, a person could invest in 10, 20, or more companies, and do so on a regular (dollar-cost averaging) or irregular basis. Instead, you advise people to invest blindly in mutual funds...and forget about thinking for themselves.