By Lance Roberts
A sluggish U.S. economy coupled with a bull market in stocks has left everyday Americans confused about how to save and invest for the long haul. But you can start small, with only $25, and bypass brokers by buying what's called dividend reinvestment plans, or DRIPs.
Investors are getting jittery with the stock market at all-time highs while the economy, especially the labor market, is struggling. The number of individuals over age 45 who are unemployed has increased four-fold since 2007. An even more disturbing statistic from the New School of Economics is that 75% of older Americans aren't saving adequately for retirement.
Traditional ways to save have been 401(k) retirement plans via an employer, IRAs, holding on to cash via a savings account or hiring a retirement planner. Unfortunately, many Americans don't think putting a little money aside will matter, and others think playing the markets is a game for the rich. The National Institute on Retirement Security found that people close to retirement age have an average of only $12,000 saved.
This is where DRIPs come in. DRIPs have been around for over three decades, but they're largely unknown because the SEC banned their advertisement in the early 1990s.
DRIPs are low- or no-fee shares that allow you to buy directly from a company and avoid broker fees. From Coca-Cola (KO) and Caterpillar (CAT) to IMB (IBM) and Intel (INTC), over 1,300 companies allow anyone to buy stocks -- some starting as low as $25 -- as regularly as you want. That way, you become a direct shareholder. This low-cost entry into the markets makes DRIPs a simple way for everyday Americans to invest and save for retirement.
Many feel it's too late to invest in the markets now that the S&P 500 is near a record high, while others are squeamish about their volatility. DRIPs are for the long-term investor, who should be comforted to know that, since 1994, the DRIP Index has seen an almost 800% return, outperforming the Dow Jones and Nasdaq. In fact, there is even a mutual fund, the MP 63 Fund (DRIPX), consisting of DRIP stocks. Over the past five years, DRIPX has had an annual rate of return of 21 percent.
But as with any investment, consumers need to understand the tax implications. DRIPs have a tricky taxation process requiring the use of a 1099 form that tracks the amount invested or reinvested in a stock and its total dividends in a given year.
With the economy teetering on a recovery, Americans should have the ability to put a little money aside into savings plans and not sit on the sideline as markets continue to reach all-time highs.
Lance Roberts is the chief executive officer of STA Wealth Management.
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-Lance Roberts; 415-439-6400; AskNewswires@dowjones.com
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