How to invest using direct stock purchase plans

woman at computer

So you want to buy stocks? Maybe you're interesting in investing in direct stock purchase plans? Great! But you only have a small amount of money each month to invest? You're worried about any potential returns being wiped out in the beginning by brokerage fees? You're wise to worry.

Invest $100 bucks per month with a discount broker and you're lucky if you pay commissions equal to seven percent of your investment. Seven percent! That's a decent annual return, and you're giving that up at the start. Yikes!

Of course, you could save that hundred dollars, month after month, until you have a pile of money to invest, but then you're forced to determine exactly when to buy, forced to time the market. You know this isn't a good strategy. You want to dollar-cost average your investments over time, investing a fixed amount each month, on a schedule, so that you acquire more shares when the share price is low, and fewer shares when the share price is high.

I want to share a secret with you. There's a better way. Hundreds of companies that trade on the major stock exchanges allow you to buy shares directly from their transfer agents for very little or no money.

Buying Without the Middleman

Years ago, I began buying shares of Kellogg Company (K). In the beginning, I had only $50 per month to invest. Over time, I increased my monthly investment in Kellogg to $150 per month. That money is debited from my checking account by Kellogg's transfer agent, Wells Fargo, and used to buy Kellogg stock through their Direct Purchase Plan. According to my 2008 year-end statement, I own 142.212 shares of Kellogg.

Over all of these years, for all of these transactions, I have paid no fees to accumulate these shares. Not a dime. All plan administration costs and share purchase costs are paid by Kellogg. Plus, every quarter, when Kellogg pays a dividend to shareholders, my dividend money is automatically used to buy more shares — at no cost to me. On December 16, 2008, a $46.79 dividend payment was applied to my account and used to buy 1.065 additional shares of Kellogg, at no charge to me!

Related >> Simplify Your Investing: An Introduction to DRIPs

I also buy shares of Pfizer, Inc. (PFE) every month through their transfer agent, Computershare. Pfizer's plan also costs me nothing. I've slowly acquired almost 160 shares of the company, a little bit every month, without paying a dime in commissions or fees. Zip, nada. Like Kellogg, I get a statement in the mail every month, and I can track and manage my account online.

Not All Direct Stock Purchase Plans are Completely Free

I invest $150 per month in General Electric's plan through their transfer agent, BNY Mellon Shareowner Services, and they charge $1 per purchase. So, only $149 of my $150 is used to buy GE shares. Of course, that's a lower cost than any discount broker. And my quarterly GE dividends are reinvested (used to purchase additional shares) at no cost.

Microsoft (MSFT) switched transfer agents in the middle of last year, from BNY Mellon to American Stock Transfer & Trust Co (AST). Unfortunately, in this case, the cost of my $100 monthly investment in Microsoft went from $2 to just under $3. Of all the plans I've looked into, the flat $5 fee I pay to invest $200 each month in Toyota (TM), is the highest I have seen. Toyota's transfer agent is BNY Mellon, and I suspect the cost is higher because it is a foreign company, though traded on the NYSE.

Find Direct Stock Purchase Plans for Yourself

Tip To get a good sense of what companies offer direct purchase plans, visit Computershare's website. This transfer agent administers an astounding number of company plans, and their site is the most user-friendly of the ones I've visited. You can search company plans by name, and according to plan attributes, such as “No Purchase Fees.”

But remember, any search on this site will return only companies for which Computershare is the transfer agent. If the company you search doesn't come up, go first to that company's website to determine who their transfer agent is, and whether they offer a direct purchase plan.

How to Begin a Direct Stock Purchase Plan

So how difficult is it to begin a direct stock purchase plan? It's not difficult at all. It's every bit as easy as opening a brokerage account, and the process can be defined in eight simple steps:

  1. Determine what stock you want to buy.
  2. On the “investors” page of that company's website, look for an FAQ link.
  3. In the list of FAQs, find one that regards either buying stock directly from the company or a dividend reinvestment plan.
  4. The corresponding answer will contain either a link to the company's stock transfer agent, or a statement indicating that they do not offer such a plan.
  5. Assuming they offer a direct stock purchase plan, and there is a link to the company's stock transfer agent, use it.
  6. On the transfer company's website, you will find information specific to the direct stock purchase plan for the company in which you are interested. This information will include costs associated with participating in the plan, a minimum amount required to open a plan account, and the minimum monthly investment amount.
  7. If you are still interested, follow the transfer company's instructions for opening an account. This will include entering your name, address, SSN, bank account information, monthly withdrawal amount, and whether you want dividends paid or reinvested (when applicable).
  8. You will soon be a shareholder.

Final Words

So, why doesn't everyone do this and why aren't discount brokers out of business? There are a couple of reasons.

First, when you buy a company's stock through a transfer agent, you don't have to participate in a monthly purchase plan; you can make a single, one-time purchase of a fixed number of shares. But, regardless of whether you make a one-time purchase or sign up to invest monthly, you have no control over the respective trade date.

Not many people would feel comfortable committing to invest a chunk of money, say $10,000, in a company at an unknown share price. When you use a transfer company to buy shares directly, the transaction may not happen for a couple weeks, and the purchase goes through at whatever the price happens to be at that time. Of course, if your aim is to dollar-cost average your share purchases over a long period of time, this is not a factor.

Second, companies that offer these plans don't spend money to advertise them. Contrast this with the inescapable pop-up ads for brokers like E*Trade and Sharebuilder on finance-related websites. Is it any wonder people think brokers are the only means for buying equity shares?

For the small investor who is ready to buy individual shares of a particular company, a direct stock purchase plan may be the smartest and most thrifty way to do so.

Invest wisely.

J.D.'s note: Before you invest in the stock of individual companies, be sure you understand the concepts of diversification and asset allocation. Buying individual stocks is great for some investors, but others are better served with low-cost index funds.

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