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Market Savvy | Portfolio Strategies / Ideas for Investors

'No-Load' Shares Right From the Source

October 02, 1998|JOSH FRIEDMAN | TIMES STAFF WRITER

If you've been thinking about getting started with individual stocks but are nervous about the market's downturn, "no-load" shares could be worth considering--especially as more of them approach bargain prices.

As individual investors have become increasingly self-reliant in recent years, these direct stock purchase plans have proliferated.

Charles B. Carlson, editor of the DRIP Investor newsletter in Hammond, Ind., says that there were only 52 no-load stock plans available in 1994. That number has since grown to about 500.

DRIP stands for dividend reinvestment plans, which allow shareholders in specific stocks to buy additional shares with their dividend payouts, usually via a bank or transfer agent.

By contrast, direct purchase plans, including no-load plans, allow even new investors to buy stock straight from the company.

Both types of plans appeal to long-term investors and to people starting out with stocks, because of their low fees--or no fees--compared with traditional brokerage commissions, their small minimum purchase requirements and the ability to use "dollar-cost averaging" by buying shares through monthly payments or automatic debit.

With dollar-cost averaging, you commit to buying a set dollar amount of stock each month. In down markets, therefore, your set amount--say, $100--would buy more shares; in up markets, you would get fewer shares.

So over time, dollar-cost averaging guarantees that your cost basis in the stock will be lower than if you regularly bought a set number of shares.

Dollar-cost averaging also eliminates the risk entailed in making a large investment at a single price.

Direct-purchase plans are becoming more investor-friendly as well as more common, Carlson said.

"Many of these new no-load plans allow you to sell over the phone, offer IRA options, even borrowing against the value of your account," he noted.

Though about 75% of direct-purchase plans carry fees, usually ranging from $1 to $5 per purchase, or a per-share fee, Carlson says many of the best stocks are sold no-load.

Even small investors can assemble a balanced portfolio of a few direct-purchase stocks for as little as a few hundred bucks.

Carlson's top picks for new investors interested in no-load stocks include:

* Johnson Controls, a maker of automotive systems and building controls: "This is a solid company with steady earnings growth and limited exposure overseas," he says.

* Exxon: "It's an industry leader whose wide global reach provides diversification against problems in any particular area."

* Finova, a finance firm that specializes in lending to mid-size companies: "Per-share profit growth has roughly doubled since 1992, and earnings should continue to rise in double digits in 1998 and '99. It's pulled back recently but looks like a good choice for long-term investors." Finova is down about 27% from its peak in late July.

* Becton, Dickinson & Co., a medical supplies maker: "It has a strong track record and should have double-digit earnings growth this year and next," Carlson said. "Medical devices and diagnostic systems are somewhat recession-resistant." Becton carries what Carlson calls a "negligible" 3-cents-a-share transaction fee for direct purchase.

A small number of companies not only sell their shares without fees, but offer them at a discount.

Carlson's favorite discounters include Philadelphia Suburban, a water utility pursuing a strategy of regional growth through acquisitions. The company, whose stock has a 2.5% dividend yield, offers no-fee IRA and Roth IRA options and gives plan participants a 5% markdown on shares purchased with reinvested dividends.

But not all plans carry low fees. Some nickel-and-dime buyers through enrollment charges, transaction fees and commissions. Some charge fees on reinvestment of dividends, Carlson notes. "To me, that's criminal," he says.

Plans that he pans based on high fees include those offered by such popular growth stocks as retail giant Wal-Mart Stores, food conglomerate Quaker Oats, toy maker Mattel and drug leader Eli Lilly.

High-fee plans such as these are best suited for investors who can afford the large purchases that minimize transaction costs on a percentage basis.

For a free list of companies that offer direct-purchase plans or for more information about the DRIP Investor newsletter, call (800) 233-5922.

Carlson also has come out with a new edition of his book "The Individual Investor Revolution," exploring online investing tactics and strategies for direct stock buying.

*

Josh Friedman is editor of Market Savvy. If you have a comment or story idea, e-mail josh.friedman@latimes.com.

The Direct Approach

For an investor starting out with about $1,000, newsletter editor Charles B. Carlson recommends this portfolio of "no load" stocks, which can be bought directly from the companies, regardless of whether you are already a shareholder, and carry virtually no purchase or maintenance fees:

*--*

Price-to- Ticker Thursday earn. Proj. Min. Company symbol close ratio growth* invest. Becton, Dickinson BDX $38.69 41.4 13.9% $250** Exxon XON 71.06 22.3 7.4 250 Finova FNV 47.25 17.0 16.3 500 Johnson Controls JCI 46.00 13.7 15.2 50

800 phone Company number Becton, Dickinson 955-4743 Exxon 252-1800 Finova 774-4117 Johnson Controls 524-6220

*--*

*Projected annual earnings-per-share growth for the next five years based on analysts' estimates.

**$50 for investors who agree to automatic monthly purchases of at least $50.

Sources: Drip Investor, Bloomberg News, IBES Intenational

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