Jul 23rd, 2009
The Readers Ask: How About a Stock DRIP for my Child’s Future?
One of my buddies on Twitter asked, paraphrased:
“What do you think about doing an HEI DRIP for my less than one year old baby?”
I love it when parents start thinking about the future of their child early.
Now, I do not advise parents to save for their child’s future education over their own retirement–that might sound harsh, but if the kids want to go to college (and I am all for that), they can, last resort, work through it take out loans, going to a state college to try to keep expenses down, or even a junior college (what in Hawai’i we call a community college) if needed, but you cannot borrow for retirement.
That said, let’s first consider this proposal of going with a single stock dividend reinvestment program (a DRIP)–unfortunately, we don’t have as much information about this situation as we’d like–versus other possibilities.
Putting all your money–whether it’s for a particular purpose like college (which I’m assuming is what is the driver behind this question) or retirement, or just for your own savings–into one stock is the opposite of diversification, and greatly increases your risk. Remember when I was discussing all of the different items in my portfolio, and how I took care to say that a particular stock or fund made up a certain percentage of my portfolio? That’s because I try to avoid having a high level of concentration of my money in a single stock (if it is, however, a diversified fund–like an index fund–then having a high level of concentration in the fund is fine). I try to have no more than 4-5 percent of my total portfolio into a single stock.
Putting that aside, the idea of a DRIP is in general a great one. Instead of getting paid the dividend in cash, more of the stock that paid the dividend is bought. Additionally, dividends have received preferential tax treatment for a few years (which is the key phrase here), adding to the attraction of dividend paying stocks. Unfortunately, as economic times have gotten tougher, many companies have cut their dividends, and if the reduced rate at which qualified dividends are taxed goes away, dividend paying stocks (and therefore DRIPs) will also become less attractive.
Let’s also remember that while many companies offer DRIPs, often brokerage houses let you reinvest dividends just as if you were involved in an “official” DRIP–call it an artificial DRIP. Firstrade and Sharebuilder, where I have brokerage accounts, both allow this.
Of course, if this stock is being bought in a sheltered account of some kind, the tax consideration changes. Since I believe the stock would be purchased for educational purposes, let’s consider the two best ways to save for education, the Coverdell Education Savings Accounts (ESA) and the 529. I do not know of a 529 plan in which individual stocks can be purchased; apparently there are some low cost Coverdells which are essentially brokerage accounts. If this stock is indeed being purchased for this purpose, I’d suggest using one of these Coverdell brokerage accounts with low costs (and I am very outside my area of expertise here, so consider checking out Saving for College on the Web).
In principle, if one wanted to buy an individual stock and create a DRIP program for their child’s educational future, I would suggest instead of HEI (which we will cover soon), the purchaser open a Coverdell ESA with one of the discount brokerages (E*Trade, Scottrade, TD Ameritrade, and Schwab all appear to offer these accounts) and instead go with an Exchange Traded Fund of a broad stock market index such as Vanguard Total Stock Market Exchange Traded Fund (VTI), where despite having just one holding you have the diversification of the entire stock market.
All of that said, let’s take a quick look at HEI:
HEICO Corporation (whom I had never heard of prior to researching this question) is apparently a company involved in electronics, defense, and aerospace. It is quite high tech. It pays a tiny dividend (12 cents a share, or .30%) but its performance has trounced the S&P 500 since it went public in 1992.
In other words, this stock has done well over time–extremely well–and if you got in early you’d be flying right now. There’s not much reason to think it won’t continue to do well. But that said, it’s still just one stock, and you still run the risk of it underperforming the market.
If it were me and I just wanted a single stock to run with, I would have to say to go with VTI and set up the account to reinvest the (larger than provided by HEI) dividends. HEI may make a great addition to that, but I cannot recommend putting all of your investing eggs into a single stock when you can easily get the diversification of the entire market in a single share of an ETF.


