Direct reinvestment plans lure risk-shy investors
NEW YORK, Oct 17 (Reuters) - With risk aversion running high and some retail investors preferring to steer clear of brokers during the financial crisis, the practice of investing directly in companies is gaining popularity.
So far in October, more investors have bought The Moneypaper's Guide to Direct Investment Plans than for the whole of September, while the number of people enrolling in these plans has also spiked.
More than 1,300 companies, including Coca-Cola (KO.N) and Johnson & Johnson (JNJ.N), offer direct investment plans that enable shareholders to buy stock directly from the company, in small amounts, while avoiding brokerage fees.
They are also known as dividend reinvestment plans, or DRIPS, as they use dividends paid to buy more stock, enabling investors to slowly build their positions.
"There's no broker involved -- that might be a reason why people are calling us now. You have the risk of your broker failing totally removed," said Vita Nelson, editor of the Moneypaper, based in Rye, New York.
"In today's environment, maybe they feel the big well-known companies are better places to store your cash and get dividends than banks."
The Moneypaper's website, which promotes direct investment plans, had 18,352 hits in August.
Fast forward to the first two weeks of October, when it had about 34,000, reflecting growing interest in the strategy. The surge in investors' interest in DRIPs followed September's shocks of Lehman's bankruptcy and Merrill Lynch's "shotgun wedding" sale to Bank of America.
As more investors are shunning risk, Nelson said, the average age of those participating in DRIPs is also dropping. Two years ago, the average DRIP investor was in his early 50s. Now he is in his mid-40s.
There are some problems with dividend reinvestment plans. They can take a long time to liquidate, as some companies require a written request before investors can cash out. And while they can avoid broker fees and minimum investments, they also don't get access to broker research and recommendations to help them with their investment decisions.
But, Nelson said, most investors in dividend reinvestment plans are in it for the long haul.
"It's difficult to time the market, and people who are inquiring about these plans have seen big parts of their investments disappear. They still want to be in the market, though, but realize that taking a big position is maybe not a good idea right now," Nelson said. (Editing by Jan Paschal)
