Investing from scratch

If a lack of cash has kept you out of the market, here are three low-cost ways to get in

it worthwhile.

That’s where direct stock plans (DSPs) and dividend reinvestment plans (DRPs) (also known as DRIPs) come in. Companies that offer DSPs and DRPs are essentially cutting out the middleman to give you a cheaper way of owning their shares. The companies offering either plan allow you to make steady, small purchases of shares and will often agree to make regular withdrawals from your checking or savings account, so you can build a position in a stock over time. Often enough, you can start up with little (say $50, $100 or $250) or no money. And, by buying shares directly from the company, you can save a bundle on brokerage commissions.

Although the names are similar, we prefer DSPs to DRPs. That’s because DRPs often require you to buy at least one share from a broker before joining the company’s plans. DSPs, however, let you skip the broker altogether and get your initial shares from company headquarters or through certain banks. Today, there are over 400 companies with DSP plans, including Sears (NYSE: S), WalMart (NYSE: WMT) and Merck (NYSE: MRK). According to Standard & Poor’s, that number should bolt to about 1,000 by the end of next year.

Another feature of DRPs and DSPs is dividend reinvestment. In other words, should your company pay a dividend, any amount your account accrues over time can be reinvested in company shares. As we’ve said before in BE, dividends are not only a great source of income, they also help to guard a stock from the herky-jerky motion the market can go through. There’s another plus: compounding. For example, look at the S&P 500 Index over the past 10 years. An investment of $1,000 in the index alone would have grown to $3,160 during the 10-year period ended May 31 of this year. But, plow the dividends back into your account, and that sum jumps a full 43% to $4,520 over the same time.

Sounds too easy to be true? One person who isn’t scoffing at direct share purchase plans is William E. Thomason, 33, director of portfolio management for Parnassus Investments, a San Francisco money management and mutual fund company. “That’s how I got my start in the market,” says Thomason, who grew up in Detroit. When he was a teenager, his mother encouraged him to read up on stocks and the market. Eventually, he began calling up companies to get prospectuses and stumbled across DRPs. “I started with companies that I, as a teenager, would know,” he recalls. “First off, I put in $25 a month into Coca Cola (NYSE: KO). I got my stock certificate in the mail, and I was on my way.”

In no time, Thomason had a burgeoning portfolio on his hands, one with stakes in McDonald’s, Wrigley’s, Detroit Edison and AT&T. And even after he got a degree in public policy and finance and went into the high-finance world of money management, he never left his direct purchase plans behind. In fact, he still owns Coke and has

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