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"No-load" is a term usually associated with mutual funds, but one investment manager applies it to the technique of buying stocks directly from the company and bypassing brokers -- and their fees.
Charles B. Carlson is editor of the DRIP Investor and No-Load Stock Insider newsletters, and co-portfolio manager of the Strong Dow 30 Value Fund. He's also an author whose most recent book is Eight Steps to Seven Figures.
Chuck Carlson sees DRIPs (dividend-reinvestment plans) as an easy way to build a long-term portfolio and notes that such plans are offered by 28 of the 30 companies in the Dow Jones industrial average. Many of them also make it possible for an investor to make an initial stock purchase when setting up a DRIP, perhaps with automatic deductions.
On specific stocks in his fund, Carlson now particularly likes Citigroup, Microsoft, Boeing, Intel, the drug stocks, and Philip Morris. He made these comments in a chat presented on America Online by Business Week Online on July 6, in response to questions from BW Online's Jack Dierdorff (the moderator) and Amey Stone and from the online audience. Edited excerpts follow. For a full chat transcript on AOL, go to keyword: BW Talk.
Q: Chuck, the tradition with these chats (if you can have traditions in Cyberland) is to first ask the guest expert to diagnose the stock market -- going nowhere, it seems, right now. Do you agree with Abby Joseph Cohen and others that the second half will see a recovery?
A: Yes, I do. I think you will see a better interest-rate environment in the second half of the year, and that's good news for stocks. I also believe that corporate profits will hang in there in the second half, which is also good news for stocks. Finally, I believe you will see much-needed leadership coming again from the technology sector....
Q: Chuck, why don't you tell us a little bit about the DRIP [dividend-reinvestment plan] concept, and do you think the current market conditions will make it more popular with investors?
A: DRIP investing is incredibly empowering for investors, given that it allows any investor to buy stocks directly from the company, without a broker and without paying a lot in brokerage fees. One attractive aspect of DRIPs is that investors oftentimes can invest as little as $25 or $50 to buy some of America's greatest blue chips....
Q: In numbers, how many DRIPs are available that are blue chips?
A: As an example, 28 of the 30 stocks that make up the Dow Jones industrial average offer DRIPs. The only two Dow stocks that do not offer DRIPs are Microsoft [MSFT] and Citigroup [C]. That's an indication of the type of blue-chip stocks that offer the plans.
Q: What's your answer to the tax issues of DRIPs -- the backtracking and bookkeeping when you sell the shares?
A: Good question. There are no special tax considerations with DRIPS that you don't have with any other investment. As is the case with any investment, you need to keep track of your cost basis when you buy and sell DRIPs....With computers and software products such as Quicken, it has never been easier to keep track of your DRIP plans. Still, if you're someone who throws out your statements, you will have problems if you sell stock and have to determine your cost basis.
Q: How do I go about setting up an automatic deduction to be applied to several Dow DRIPs?
A: Fortunately, most DRIP plans have automatic-deduction services, whereby the plans will automatically take money out of your bank account each month. To establish these automatic-deduction plans, you only need to contact the plan's transfer agent....
Q: Chuck, you often use the term "no-load stocks." Can you explain what that means, since most people only associate it with funds?
A: Sure. I coined the phrase "no-load stocks" to describe those plans that allow investors to go directly to the company, even to buy their initial shares. These plans operate much like no-load mutual funds in that you can buy directly, without a broker, by simply filling out an enrollment form and returning it with your check. No-load stocks also share other features with no-load mutual funds, such as the ability to make automatic investments via bank deduction, as well as the ability in some cases to set up IRA programs within the plan....
Q: How do you find out which companies will sell stock directly this way?
A: I'm biased, but a good way to check out which companies sell stock directly is my Web site, www.dripinvestor.com.
Q: Don't you think mutual funds provide you more diversity than a DRIP?
A: Certainly, a single mutual fund provides more diversity than one DRIP. However, I'm not convinced that a portfolio of 13 to 17 different DRIPs is that much worse off in the diversification department than a mutual fund. I think a better way to look at this question is to say that...an investor can do well to have both DRIPs and mutual funds in a well-diversified portfolio.
Q: I think a DRIP is what I'm looking for.... I'm looking to put $100 per month into a stock for the kids' college fund.
A: I think a DRIP would be an excellent way to set aside money for your child's education. One particular DRIP that has no fees and accommodates investments of $100 or less is Intel [INTC].
Q: I've always thought of a DRIP as a vehicle for someone who already owns some shares of a stock and wants to add gradually to the position, on a dollar-averaging basis -- in other words, not as an initial investment in the stock....
A: I think DRIPs are perfect for dollar-cost averaging because of their low investment requirements. Historically, you could not enroll in most DRIP plans without first owning the stock. Fortunately, there are now more than 500 DRIPs that will allow you to make even your initial purchase directly...[including] Nokia [NOK], Lucent [LU], General Electric [GE], Walgreen [WAG], Motorola [MOT], Wells Fargo [WFC], McDonald's [MCD], and even Yahoo! [YHOO].
Q: What's better for a DRIP: a high-dividend stock like 3M [MMM] or a stronger-growth/lower-dividend stock like Intel [INTC]?
A: My preference would be to invest in a stock with good growth prospects and with a fast-growing dividend. In other words, I would rather invest in a stock with a low yield but a fast-growing dividend than invest in a stock with a high yield but a slow-growth dividend. Thus, in your example, I would rather own Intel.
Q: Your fund, the Strong Dow 30, follows a modified "dogs of the Dow" strategy. How is it working these days, and what stocks are you overweighting?
A: The Strong Dow 30 Value Fund invests exclusively in the 30 stocks that make up the Dow. In the fund, we have the ability to overweight and underweight Dow stocks relative to their weighting in the index. For example, one of our favorite stocks in the Dow currently is Citigroup. Thus, we overweight Citigroup in our fund relative to Citigroup's weighting in the Dow index. Conversely, we don't like Coca-Cola [KO] at this time. Thus, we underweight Coca-Cola in the fund.
One of our criteria for picking stocks is yield. However, we think there are several other criteria that are extremely useful in picking value stocks, such as revenue and earnings momentum, earnings revisions, and price momentum. We have handily outperformed a straight "dogs of the Dow" strategy. That strategy invests in only the 10 highest-yielding Dow stocks.
Q: How do you see high energy prices affecting the market, and especially the stocks you follow most closely for the fund and for DRIPs?
A: I think oil prices have peaked. Thus, I think the impact of oil prices will lessen on stocks, going forward. In fact, I'm probably one of the few analysts that believes most oil stocks are rather pricey.
Q: You mentioned Citigroup as a current favorite -- what other Dow stocks do you see as buys right now?
A: Other fund favorites include Microsoft, Boeing [BA], Intel, and the drug stocks. We also like Philip Morris [MO].
Q: What's your thinking on Philip Morris? That's quite a controversial stock.
A: Yes, it is controversial. We started to aggressively buy the stock in the low 20s. Our feeling was that Philip Morris was becoming a "protected species." In other words, there were so many politicians with their hands in Philip Morris' pockets that suddenly these politicians needed to protect Philip Morris from extinction. We think the company will start to make better use of its assets. We think the Nabisco deal is the start of the company's unlocking the value of its food business.
Q: I have 100k to invest -- any suggestions?
A: I would focus primarily on stocks and mutual funds. I would probably have 15% to 20% of the money in some good international funds. I would put 40% to 50% in either equity mutual funds or large-cap blue-chip stocks, such as those stocks in the Dow. I would focus the remainder on small- or mid-cap stocks or mutual funds....
Q: It sounds to me, Chuck, as if no-load stocks, DRIPs, and your fund are all primarily for longer-term investors rather than for a quick buck.
A: That is correct. I think the best way to invest is for the long term. In fact, I rarely sell investments. I have only sold one stock in my personal portfolio since 1992!
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