Aliksander Hansen may be just 2 years old, but he's into the stock market in a big way.
That's because Aliksander is lucky enough to have Lorrie Gustin for a great-aunt.Gustin, a trustee of the National Association of Investors Corp. and a director for its Milwaukee council, bought Johnson Controls Inc. stock for Aliksander for his baptism and has continued contributing to the holding.
She's able to do that because she enrolled Aliksander in a dividend reinvestment plan.
"I'm sure he's going to feel great about it when it comes time to go to college," Gustin said.
Dividend reinvestment plans, or DRIPs, allow investors who own one or more shares of the company's stock to use their dividends to buy more stock without paying commissions.
A growing number of DRIPs, like that of Johnson Controls, also are allowing investors to buy their first share directly from the company without paying a commission.
"There really isn't anything out there like it," said Charles B. Carlson, editor of The DRIP Investor newsletter and another publication published by NorthStar Financial Inc. in Hammond, Ind.
To Carlson, the best part of DRIPs isn't the ability they give you to reinvest dividends, though.
"What really gives them the cachet is the ability they give investors to use optional payments," Carlson said.
Gustin, for example, puts money into Aliksander's Johnson Controls DRIP on every occasion that calls for a present.
Why aren't all investors going this route? Many aren't familiar with DRIPs or don't know how to find them.
"And a broker's not going to tell you about them," said Alison M. Reis, a registered investment adviser in Milwaukee.
Still, a lot of people believe, like Gustin, that they make the perfect gift.
"You can spend money on a gift for someone and you don't know if they'll use it or throw it away," said Marty Mernitz, administrator at First Share Inc. in Westcliffe, Colo.
DRIPs are great for novices, too, because they allow investors to mold diversified investment portfolios even if the investors don't have a lot of money, Carlson said.
Reis, who puts money into DRIPs for her daughter, says regular DRIP investing gives investors the chance to invest a fixed amount at set intervals.
"You're insulated from the hysteria of the marketplace," agreed Vita Reiner Nelson, editor and publisher of The DRP Authority and three other DRIP newsletters published by The Moneypaper Inc. in Mamaroneck, N.Y.
There are some downsides to DRIPs. Investors don't have much control over the price they're paying for shares because the nature of the plans forces them to hang in for the long term, said Joseph R. Tigue, editor of "The Standard & Poor's Directory of Dividend Reinvestment Plans," published in New York City.
That's a good reason to stay away from more volatile stocks such as those of high-tech companies, said Sumie Kinoshita, editor of "Directory of Companies Offering Dividend Reinvestment Plans" and another publication published by Evergreen Enterprises in Laurel, Md. She suggested sticking with stocks in the Dow Jones industrial average or the Standard & Poor's 500 index that have good fundamentals.
"It can't be an off-the-wall stock that's never listed in the paper," she said.
Another downside to DRIPs is that "taxes can be hairy," Tigue said.
That's because the stock is being bought at a variety of prices, making it difficult to determine the cost basis. But investors who keep all of their statements should have little trouble, he added.
"A DRIP is just a vehicle for buying the stock," said Carlson.
First, Carlson said, he evaluates the quality of a stock he's considering investing in.
Then Carlson looks at whether the company he's considering has solid finances, has earnings stability and growth potential, is in an attractive industry group, is an industry leader and has a user-friendly DRIP with reasonable fees and good service.
Most DRIP advocates agree the best stocks for kids are those of companies they can relate to. For example, Mernitz suggests Harley-Davidson Inc., Mattel Inc. or Wm. Wrigley Jr. Co., which sends shareholders a complimentary box of chewing gum each Christmas.
Reis also suggested the always recognizable Coca-Cola Co. Coke's DRIP allows investors to start with just one share and has a good range for optional payments - with a minimum of $10 a month and a maximum of $60,000 a year, she said.