What does McDonald's, the restaurant chain, have in common with Fidelity mutual funds?
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On the other hand, stocks such as McDonald's, Exxon, Procter & Gamble, and U S West require you to use a broker to make your purchases, right?Well, you might be surprised to learn that McDonald's, Exxon, Procter & Gamble, and U S West are just four of the growing number of companies in which investors may buy their first share and every share of stock directly from the firm - without using a broker. McDonald's, Exxon, Procter & Gamble, and U S West are what I call No-Load Stocks.
What's a No-Load Stock? Contents
No-load stocks share many of the features that are usually associated with no-load mutual funds. The most obvious common trait of no-load mutual funds and no-load stocks is that both are purchased without using a broker or paying brokerage commissions in many cases. In both cases, investors deal directly, via the mail.
The process for buying no-load stocks is the same as buying no-load mutual funds:
- Call for information. Investors must first contact the company to obtain an application form and a plan prospectus. The plan prospectus describes in great detail all of the aspects of the no-load stock program - what the minimum is for the initial investment, when the funds will be invested, how investors may sell shares through the company, and any other features the plan offers. In most cases, companies have toll-free telephone numbers to handle inquiries, which is similar to the toll-free numbers provided by no-load mutual funds.
- Fill out the application form. Once you've received the material in the mail, read the prospectus and fill out the application form.
- Cut a check. To make your initial investment, cut a check to the company or its transfer agent. Instructions will be given on the application form. Make sure that your initial investment falls within the parameters for the minimum and maximum investment.
- Mail it to the company. Put your check and application form in an envelope and return it to the company.
And that's it.
In most cases, your initial investment will automatically enroll you in the company's dividend reinvestment plan and/or stock purchase plan. With these programs, you can have your dividends reinvested as well as make additional cash investments to purchase more shares.
Low Investment Minimums Contents
A big reason mutual funds are so popular with small investors is that they don't require huge investments to get started. Fortunately, no-load stocks have taken their cue from the mutual-fund industry and have made their minimum initial investments quite affordable, usually $50 to $500.
What's nice about such low minimums is that an investor can diversify among several no-load stocks with very little money.
Below is a list of all no-load stocks which have open enrollment (available to investors in most or all 50 states) along with their initial investment minimums:
Company Minimum Company Minimum ABT Building Products $250 AFLAC $750 AirTouch Communications $500 American Recreation Centers $100 Amoco $450 Arrow Financial $300 Atlantic Energy $250 Atmos Energy $200 Augat $250 Bard C.R. $250 Barnett Banks $250 Bob Evans Farms $50 Capstead Mortgage $250 Central & South West $250 Central Vermont Public Svc. $50 CMS Energy $500 COMSAT $250 Crown American Realty Trust $100 Dean Witter, Discover $1,000 DeBartolo Realty $500 Dial $100 DQE $105 DTE Energy $100 Duke Realty $250 Eastern Co. $250 Energen $250 Enron $250 Exxon $250 First USA $1,000 Hawaiian Electric Industries $100 Home Properties $2,000 Houston Industries $250 Integon $500 Interchange Financial Svcs. $100 Johnson Controls $50 Kellwood $100 Kerr-McGee $750 Madison Gas & Electric $50 McDonald's $1,000 MidAmerican Energy $250 Mobil $250 Morton International $1,000 NorAm Energy $200 Oklahoma Gas & Electric $250 Oneok $100 Philadelphia Suburban $500 Piedmont Natural Gas $250 Pinnacle West $50 Portland General $250 Procter & Gamble $100 Reader's Digest $1,000 Regions Financial $500 SCANA $250 Tenneco $500 Texaco $250 Tyson Foods $250 U S West Comm. Group $300 U S West Media Group $300 Urban Shopping Centers $500 UtiliCorp United $250 Western Resources $250 Wisconsin Energy $5 WPS Resources $100 York International $1,000 Below is a list of no-load stocks which have certain restrictions on enrollment, along with their initial investment minimums: Contents
Company Minimum Company Minimum American Water Works $100 Bancorp Hawaii $250 BanPonce $25 Boston Edison $500 Brooklyn Union Gas $250 Carolina Power & Light $20 Cascade Natural Gas $250 Centerior Energy $10 Central Fidelity Banks $100 Central Hudson Gas & Electric $100 Central Maine Power $25 Connecticut Energy $250 Connecticut Water Service $100 Delta Natural Gas Company $100 Dominion Resources $20 Duke Power $25 Enova $25 Florida Progress $100 Green Mountain Power $50 Idaho Power $10 IES Industries $50 Interstate Power $50 IWC Resources $100 Minnesota Power & Light $10 Montana Power $100 National Fuel Gas $200 Nevada Power $25 New Jersey Resources $25 Northern States Power $100 Northwestern Public Service $10 NUI $125 Puget Sound P&L $25 Southwest Gas $100 Union Electric no minimum United Cities Gas $250 United Water Res. $25 WICOR $100
And not only do no-load stocks make it easy to get started by having low investment minimums for the initial purchase, they make it even easier to continue accumulating stock over the long term. In general, investment minimums for subsequent purchases in no-load stock programs are $10 to $100. The beauty of such low minimum requirements is that you can add to all of your no-load stock holdings with a relatively small investment each month.If you have deeper pockets, no-load stocks are still an attractive investment option. Like mutual funds, which permit huge investments, most no-load stocks have maximum investment amounts that will be adequate for nearly every investor. For example, Exxon permits annual investments of up to $100,000. And remember - other than a no-load mutual fund, where else can you invest such large sums of money and pay virtually no commissions?
Below are the minimum and maximum investments permitted by no-load stocks once you've enrolled in their stock purchase plans: Contents
Company Minimum-Maximum ABT Building Products $50-$100,000 per year AFLAC $50-$120,000 per year AirTouch Communications $100-$10,000 per transaction American Recreation Centers $25-$5,000 per month American Water Works $100-$5,000 per month Amoco $50-$150,000 per year Arrow Financial $50-$10,000 per quarter Atlantic Energy up to $100,000 per year Atmos Energy $25-$100,000 per year Augat $100-$100,000 per year Bancorp Hawaii $25-$5,000 per quarter BanPonce $25-$10,000 per month Bard (C.R.) $25 min./no max. Barnett Banks $25-$10,000 per month Bob Evans Farms $10-$10,000 per month Boston Edison $50-$40,000 per year Brooklyn Union Gas $25-$100,000 per year Capstead Mortgage $50-$10,000 per month Carolina Power & Light $20-$2,000 per month Cascade Natural Gas $50-$20,000 per year Centerior Energy $10-$40,000 per year Central Fidelity Banks $25-$10,000 per month Central Hudson Gas & Electric $25-$10,000 per quarter Central Maine Power $10-$40,000 per year Central & South West $25-$100,000 per year Central Vermont Public Service $50-$2,000 per month CMS Energy $25-$120,000 per year Comsat $50-$10,000 per month Connecticut Energy $50-$50,000 per year Connecticut Water Service $100-$3,000 per quarter Crown American Realty Trust $100-$5,000 per quarter Dean Witter, Discover & Co. $100-$40,000 per year DeBartolo Realty $50-$30,000 per quarter Delta Natural Gas $25-$50,000 per year Dial $10-$5,000 per month Dominion Resources up to $50,000 per quarter DQE $10-$60,000 per year DTE Energy $25-$100,000 per year Duke Power $25-$20,000 per quarter Duke Realty Investments $100-$5000 per month Eastern $50-$150,000 per year Energen $25-$100,000 per year Enova $25-$25,000 per quarter Enron $25-$120,000 per year Exxon $50-$100,000 per year First USA $100-$3,000 per month Florida Progress Corp. $10-$100,000 per year Green Mountain Power $50-$40,000 per year Hawaiian Electric Industries $25-$100,000 per year Home Properties of NY $50-$5,000 per month Houston Industries $50-$120,000 per year Idaho Power $10-$15,000 per quarter IES Industries $25-$120,000 per year Integon $50-$120,000 per year Interchange Financial Services $25 min./no max. Interstate Power $25-$2,000 per month IWC Resources Corp. $100-$100,000 per year Johnson Controls $50-$15,000 per quarter Kellwood Co. $25-$3,000 per month Kerr-McGee $10-$3,000 per quarter Madison Gas & Electric Co. $25-$25,000 per quarter McDonald's Corp. $100-$250,000 per year MidAmerican Energy Co. $25-$10,000 per month Minnesota Power & Light $10-$10,000 per quarter Mobil $10-$7,500 per month Montana Power $10-$60,000 per year Morton International $50-$60,000 per year National Fuel Gas $25-$5,000 per month Nevada Power $25-$25,000 per quarter New Jersey Resources $25-$60,000 per year NorAm Energy $25-$60,000 per year Northern States Power $25-$10,000 per quarter Northwestern Public Service Co. $10-$2,000 per month NUI Corp. $25-$60,000 per year Oklahoma Gas & Electric $25-$100,000 per year Oneok $25-$100,000 per year Philadelphia Suburban $25-$10,000 per year Piedmont Natural Gas $25-$3,000 per month Pinnacle West Capital up to $60,000 per year Portland General $25-$75,000 per year Procter & Gamble $100-$120,000 per year Puget Sound P & L $25-$100,000 per year Reader's Digest Association $100-$10,000 per month Regions Financial $25-$10,000 per month SCANA $25-$100,000 per year Southwest Gas $25-$50,000 per year Tenneco $50-$60,000 per year Texaco $50-$120,000 per year Tyson Foods $50 min./no max. Union Electric up to $60,000 per year United Cities Gas $25-$10,000 per quarter United Water Resources $25-$3,000 per quarter U S West Communications Group $25-$100,000 per year US West Media Group $25-$100,000 per year Urban Shopping Centers $50 min./no max. UtiliCorp United $50-$10,000 per month Western Resources $20-$60,000 per year WICOR $100-$10,000 per month Wisconsin Energy $25-$50,000 per quarter WPS Resources $25-$100,000 per year York International $100-$10,000 per month
Regular Statements/Record-Keeping Assistance ContentsAnother way no-load stocks and mutual funds are similar is in the regular statements each sends to their investors. Companies with no-load stock programs send a statement to investors after every investment. The statement shows the number of shares purchased, the purchase price, the total number of shares held in the account, and, in some cases, the total value of the shares. Companies also provide a year-end statement to assist you at tax time.
When you buy shares directly from a no-load mutual fund, you are the registered owner of the fund shares. That's not always the case when investors buy stock. Indeed, although this may surprise you, most stock investors are not the registered shareholders of the companies in which they invest. In fact, it's possible, indeed likely, that your company has no record of you as a shareholder. How can that be?
The fact is that, unbeknownst to many investors, their shares are held in "street" name or, in other words, in the name of the brokerage firm which purchased the shares for you.
There are two ways to own stock - in "street" name or as a registered shareholder on the books of the corporation. The identity of street-name investors is withheld from the company. All correspondence between the investor and the company goes through the brokerage firm.
The reason many investors end up with street-name accounts is because this is the method of ownership that brokers push. To be sure, holding shares in street name has certain advantages, primarily ones of convenience. The amount of paperwork is reduced since brokerage houses act as custodian of your funds, providing regular consolidated statements that help in record keeping and tax preparation. In street-name accounts, investors don't have to worry about storing certificates. Street-name ownership also makes selling easier since the shares are immediately available to the brokerage firm to sell.
The benefits of street-name ownership, however, carry a price. What you gain in convenience with a street-name account, you lose in control and flexibility. For example, want to sell your shares? If the stock is held in street name, the odds are that you'll sell through the broker who bought your shares. Thus, street-name ownership greatly reduces your ability to shop for the cheapest commissions; you are, in effect, locked in to paying the commissions of the brokerage firm where your shares are held. Sure, you can always re-register the shares in your own name, take ownership of the stock certificates, and sell the shares through any broker you'd like. However, many brokers charge dearly to register shares in the investor's name, and the reregistration process can drag on forever.
In addition to locking up an investor's assets, brokers like street-name accounts because they can earn fees from lending street-name shares to short sellers and other investors. It's perfectly legal for a brokerage firm to lend your shares if you have a margin account, just as it's perfectly legal for a bank to loan your money. And, like the bank which receives interest on loans made with your money, brokerage firms earn fees on your shares that they lend to investors.
Another cost of having stock registered in street-name is that it precludes you from enrolling in company-sponsored dividend reinvestment and stock purchase plans (DRIPs). In nearly every case, companies with DRIPs require participants to be the registered shareholder. Investors who want to buy stock directly from a company cannot do so if their stock is held in street name.
Another potential problem of owning shares in street name is that it may be difficult to receive reports from the company. A number of companies have stopped sending financial reports to brokerage firms to disseminate to street-name accounts. More companies are expected to follow suit due to high clerical, printing, and postage costs. In many cases, unless you're a registered shareholder, you could be cut out of the information flow from the company.
Missing out on special shareholder perks and discounts is another potential cost of having stock registered in street name. Many companies provide special discounts, freebies, and giveaways to their shareholders. For example, Wrigley, Wm., Jr., the chewing gum company, sends each shareholder 20 packs of gum every year around Christmas. Brown-Forman, the spirits and consumer-products company, has made available in the past to shareholders discounts on Lenox china and Hartmann luggage. In many instances, the perks are available only to registered shareholders, not street-name holders. (For further information on shareholder perks and freebies, let me plug my book, Free Lunch on Wall Street: Perks, Freebies, and Giveaways for Investors, published by McGraw-Hill and available for $14.95 plus $3 shipping and handling by calling 219-852-3220.)
Fortunately, when you buy no-load stocks, you automatically become a registered shareholder with the company, the same as if you bought mutual-fund shares directly from the fund company. As a registered shareholder, you have control over the shares. If you want to take possession of stock certificates in order to sell through a broker of your choice, notify the company and certificates will be sent immediately. And as a registered shareholder, you're assured of receiving all quarterly and annual reports.
When you purchase shares in a mutual fund, you are not sent share certificates. Rather, your holdings are recorded in book-entry form. No-load stock programs have adopted a similar system of recording ownership. Shares purchased in no-load stock programs are registered in book-entry form. There are no physical certificates. However, if a shareholder wants to take possession of the stock certificate, all he or she has to do is notify the company or its transfer agent, and a certificate will be created and sent to the investor. Such " safekeeping" services are attractive because they relieve investors from having to store stock certificates. Any of you who have gone through the hassle of getting a replacement certificate because your certificate was lost, stolen, or damaged know the value of having the shares held by the company in book-entry form.
When you invest, say, $1,000 in a no-load mutual fund, all of your money is invested, regardless of the net asset value of the mutual fund. In other words, a $1,000 investment in a mutual fund with a net asset value of $23.50 will buy 42.553 shares, and the mutual fund will carry the investor on its books with an investment of 42.553 shares, fractional shares and all.
It's a different story when you buy individual stocks. Let's say you want to invest $1,000 in McDonald's, and the stock is trading at $53.25 per share. Even though your $1,000 is worth 18.779 shares of McDonald's, no broker is going to sell you fractional shares. What this forces investors to do is invest not on their own terms, but on those offered by the broker. Want to invest a full $1,000 per month in a stock, regardless of the price? You can't if you go through a broker. You'll have to invest amounts that buy whole shares.
I know some of you are probably thinking I'm making a mountain out of a molehill, but I disagree. The mutual-fund industry understands that small investors don't necessarily think in terms of how many shares they can buy each month in a stock or mutual fund; they think in terms of the number of dollars they can squeeze out of their monthly budgets to invest. The mutual-fund industry accommodates small investors by giving them an opportunity to invest their entire "budgeted" investment each and every month, regardless if the investment buys whole shares or fractional shares; the brokerage community does not. Fortunately, no-load stocks have parted ways with traditional stock investing by allowing an investor's entire investment to go toward whole and fractional shares. And no-load stocks will also allow you to purchase fractional shares with subsequent monthly purchases once you've enrolled in their stock purchase programs.
Mutual funds will accept money from investors anytime. Of course, so will brokers, but they'll also take their cut each time. One drawback of no-load stocks is that the opportunities to purchase stock each month are limited. Many no-load stocks invest money only once a month. However, that situation is changing. No-load stocks are realizing that investors want the flexibility to make more frequent purchases, especially if a stock drops in price. Thus, several no-load stock programs have instituted more frequent purchases. Exxon and McDonald's, for example, will buy shares once a week for investors in the stock purchase program, and McDonald's may buy shares daily if practical. Look for more no-load stocks to institute weekly and perhaps daily purchases over the next few years.
Selling a mutual fund is easy - just a phone call in many instances. And in most cases, no fees are charged for selling mutual-fund shares. Selling stock through a no-load stock program, unfortunately, is not as easy. In most cases, the companies require a sell notice in writing, and it may take five to 10 business days to sell the shares and additional time to remit the funds to the investor. In addition, most no-load stocks charge fees to sell shares for investors, although these fees are still smaller than traditional brokerage commissions. Fortunately, the situation is improving. A number of newer no-load stock plans now offer telephone redemptions. As no-load stock programs become more mainstream and companies become more comfortable adding enhancements to the programs, look for improvements in the speed and cost of selling shares through the programs.
Dividend Reinvestment Contents
Mutual funds give investors the option of receiving cash dividends and capital distributions or having them reinvested in the fund. As a rule, mutual funds don't charge investors to reinvest dividends. Having dividends reinvested in additional shares is an excellent way to build your investment over time. No-load stocks also give investors the option of having their dividends reinvested, and most of the firms charge no fees for providing this service.
Most no-load mutual funds permit investors to place their mutual-fund investments in an Individual Retirement Account (IRA), and the fund acts as the custodian for the account. Because of this feature, mutual funds offer one of the easiest ways to save for retirement.
Unfortunately, including individual stocks in an IRA is not as simple in many cases. In order to do so, you must have a custodian for the account. Brokerage firms are the usual custodians for IRAs which hold individual stocks. The problem with this arrangement is that investors incur large commissions any time they buy or sell stock in the IRA. Fortunately, a number of no-load stocks provide an option for investors to include their investments in an IRA, and the company or its agent provides custodial features. No-load stocks which offer an IRA option include Atmos Energy, Barnett Banks, Exxon, and Mobil.
The IRA feature is one of the newer wrinkles among no-load stocks, but it is one that is expected to grow over time for a variety of reasons. First, having an IRA in a no-load stock program provides an avenue for a company to gain a piece of the trillion-dollar retirement investing market. As the population continues to age, this investment segment will continue to grow in importance. A company that wants to snare retirement money for its own equity base will be more competitive if it offers an IRA program to investors.
A secondary benefit of the IRA option is the nature of the relationship between investor and corporation. Companies like a stable shareholder base, one focused on long-term investing. Such a base means that the stock will be less vulnerable to the erratic trading that sometimes occurs in stocks controlled by institutional investors, who are more short-term oriented than individual investors. IRA investing implies investing for the "long haul." An IRA program brings more long-term investors to the shareholder base, which is seen as a positive by many companies.
Automatic Investment Programs Contents
Most mutual funds offer automatic investment programs. These services allow a mutual fund to withdraw electronically a predetermined amount of money each month from an investor's savings or checking account to make regular investments in the mutual fund. Investors like such programs because they simplify the investment process, save time, reduce postage costs, and ensure that investors will invest regularly in their mutual funds.
Fortunately, several no-load stock programs offer automatic investment programs for investors. DQE, an electric utility in the western part of Pennsylvania, has an automatic investment option for a minimum $10. Exxon offers monthly automatic investments with a minimum $50. Automatic investment services have been one of the faster-growing enhancements to no-load stocks and should be more prevalent in the future.
Future of No-Load Stocks Contents
To be sure, the number of no-load stocks is still small compared to the thousands of publicly traded companies. Nevertheless, the list of no-load stocks has grown dramatically in the last two years, and growth over the next two years could be even more explosive. Indeed, regulatory changes have made it easier for companies to adopt no-load stock programs. In fact, I've been told by industry insiders that a number of big-name, blue-chip companies are preparing to offer no-load stock plans over the next 6-12 months.
No-Load Stock Clearinghouse Contents
An easy way to obtain enrollment information and prospectuses for a growing number of no-load stocks is through the No-Load Stock Clearinghouse. The Clearinghouse provides "one-stop shopping" to receive the necessary materials to get started investing in many no-load stock plans. The 24-hour hotline (1-800-774-4117) is a free call for investors. The costs of operating the Clearinghouse are shouldered by participating companies.
Investing in No-Load Stocks Contents
Of course, just because a company offers a no-load stock program doesn't make it an automatic choice for investment. Investors still need to do their homework, preferencing those no-load stocks with the best financial positions, growth prospects, and long-term potential. The following companies represent solid investments among no-load stocks.
- AFLAC (NYSE: AFL) is a major provider of insurance services. Its biggest business is the sale of cancer insurance in Japan. Foreign insurance operations account for more than 80% of total revenues. AFLAC's no-load stock plan permits investors in all 50 states to make initial investments directly. Minimum initial purchase is $750. Subsequent investments can be made for $50 to $120,000 per year. Optional cash payments are invested twice a month. The firm offers automatic investment services in which an investor may automatically have money taken from his or her bank account each month to purchase stock. There are no purchase fees associated with the plan. For further information and an enrollment form call (800) 774-4117.
- Amoco (NYSE: AN) is one of the largest oil companies in the country. The company is also the largest holder of natural gas reserves in North America and has a sizable chemical business. Amoco's new no-load stock plan permits initial purchases with a minimum of $450. Subsequent investments may be made for $50 to $150,000 per year. Optional cash payments are invested weekly. There is an $8.50 enrollment fee. Purchase fees are 7 cents per share plus 5% (maximum $3) of the amount of optional cash payments. The company charges $10 plus 12 cents per share to sell shares through the plan. Automatic investment services are available at a charge of $1 per ACH investment. For further information about the plan and an enrollment form call (800) 774-4117.
- First USA (NYSE: FUS) is one of the largest credit card companies in the U.S. The firm issues Visa and MasterCard credit cards and also processes credit card transactions on behalf of merchants. Initial purchases may be made by investors in every state except North Carolina, North Dakota, and Vermont. Minimum initial purchase is $1,000. Once in the plan, subsequent investments may be made for $100 to $3,000 per month. The firm may grant waivers to parties who would like to invest more than $3,000 per month. The company may, at its discretion, offer discounts ranging from 0% to 5%. Shares purchased on the open market will incur a small brokerage charge. For further information and an enrollment form call (800) 524-4458.
- McDonald's (NYSE: MCD) is a leading provider of fast food. Here are the plan's key features:
- Initial purchases may be made directly from the company for a minimum of $1,000. However, McDonald's will waive the $1,000 minimum if investors agree to have the company automatically deduct a minimum of $100 each month from a bank account to purchase McDonald's stock.
- Subsequent investments may range from $100 to $250,000 per year.
- Optional cash payments are invested at least weekly or, when practical, daily.
- An IRA feature is planned for the program in 1996.
- Sales may be made over the telephone.
As you can see, the new plan is quite encompassing, with such features as daily buys and frequent sells, automatic investment services, and an IRA feature. However, this increased service level comes for a price:
- A $5 enrollment fee plus applicable investment fees will be deducted from the initial investment.
- The fees for investments made via check are 10 cents per share - capped at $5 - plus a $5 investment fee.
- The fees for investments made via automatic investment services are 10 cents per share - capped at $5 - plus $1 investment fee. Thus, McDonald's is making it cheaper to invest via automatic investment services as opposed to sending a check.
- An annual $3 account fee will be deducted in quarterly installments when cash dividends are reinvested.
- Selling fees are 10 cents per share - capped at $5 - plus $10. For an application and enrollment form for the plan call (800) 774-4117.
- Piedmont Natural Gas (NYSE: PNY) is engaged primarily in the distribution of natural gas in parts of North and South Carolina and Tennessee. Residential customers account for roughly 40% of total revenues. Initial purchases in Piedmont's no-load stock plan may be made by residents in every state except Vermont and North Dakota. Minimum initial purchase is $250. Optional cash investments may be made for $25 to $3,000 per month. Shares purchased with reinvested dividends will receive a 5% discount. The firm picks up all costs on the buy side. Automatic investment services are available. For further information and an enrollment form call (800) 774-4117.