investing

Dividend reinvestment plan or mutual fund?

Don TaylorDear Dr. Don,
Would I be better off investing in a dividend reinvestment plan, or DRIP, from my favorite company, or a mutual fund that invests in that company? How can I tell what companies a mutual fund invests in? This would be after contributing up to the limit of my company's 401(k) match.

Thanks!
-- Tina Trader

Dear Tina,
You own a mutual fund because you want to diversify your investments across companies and gain access to professional investment management. You buy an individual company's stock to participate in the profitability of that one firm.

If you own a company's stock and want to reinvest the quarterly dividends it pays out to you back into the company's stock -- which is what a DRIP does -- that's fine, although you will have to pay income tax on the dividend income received.

I'm not a big fan of DRIPs as an investment vehicle to own a company's stock. The days of getting a deal in the stock by participating in its DRIP are by and large gone, as are the days of these programs being low-cost. Most DRIPs now have fees and expenses. I'd rather see you open a low-cost online brokerage account so you can invest in any stock. You could even consider one of the discount brokerage firms geared toward new investors who don't have much money to put to work all at once but want to get started investing.

You can see what stocks a mutual fund owns by reviewing its prospectus, which you should do before investing in any mutual fund, or by reviewing its quarterly filings with the Securities and Exchange Commission. Mutual funds file form N-Q, the Quarterly Schedule of Portfolio Holdings of investment management companies. But note that you'll be looking at the fund's holdings at a point in the immediate past.

Get more news, money-saving tips and expert advice by signing up for a free Bankrate newsletter.

Ask the adviser

To ask a question of Dr. Don, go to the "Ask the Experts" page and select one of these topics: "Financing a home," "Saving & Investing" or "Money." Read more Dr. Don columns for additional personal finance advice.

Bankrate's content, including the guidance of its advice-and-expert columns and this website, is intended only to assist you with financial decisions. The content is broad in scope and does not consider your personal financial situation. Bankrate recommends that you seek the advice of advisers who are fully aware of your individual circumstances before making any final decisions or implementing any financial strategy. Please remember that your use of this website is governed by Bankrate's Terms of Use.

advertisement

          Connect with us
advertisement
CD & INVESTING NEWSLETTER

Learn the latest trends that will help grow your portfolio, plus tips on investing strategies. Delivered weekly.

CDs and Investment

How should my teen invest $150K?

Dear Dr. Don, My son will turn 18 years old in December. He has $150,000 from a settlement now sitting in the bank. What is the best plan to pursue for investing this money? Is investing in precious metals a good way to... Read more

advertisement

Blog

Allison Ross

Bitcoin takes to YouTube with video

In the latest attempt to bring bitcoin to the masses -- or perhaps just to ruin another Billy Joel song through parody -- a bitcoin-themed spoof of "Uptown Girl" has made its way to YouTube audiences. The video, called "Bitcoin Girl," is produced by the nonprofit Moving Picture Institute and stars Naomi Brockwell, who works  ... Read more

Partner Center
advertisement

Connect with us