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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Frugal Dad
Frugal Dad
11 years ago

Thanks for the write-up on these plans. One thing I was wondering about is if these plans are eligible for minor/custodial accounts? I’d like to invest a little money in kid-friendly companies with my kids as a teachable lesson. This seems like a low-cost, low-frills way to do it.

Carlos
Carlos
8 years ago
Reply to  Frugal Dad

Yes, most of them have the ability o set it up as a custodial account. We have shres from our employers for the ESPP, but also buy direct through ComputerShare for the kids.

Trevor - Striking Up
Trevor - Striking Up
11 years ago

Very nice tip. This will definitely be very attractive for many people who are into investing.

Adam @ Checkbook Diaries
Adam @ Checkbook Diaries
11 years ago

This is great news! I’ve recently been buying GE stock and would never have though of buying directly like this. I certainly like the idea of not paying (or paying VERY little) to buy stock.

Thanks for the info.

Sarah
Sarah
11 years ago

This is why I prefer Fee-Only Financial Planners. They can help mitigate the risk, and don’t have brokerage fees. You pay for their professional knowledge – not a salesman.

http://www.napfa.org

Baker @ ManVsDebt
Baker @ ManVsDebt
11 years ago

Although, I’m still fighting debt and not ready to invest, this struck me a fantastic tip to those who are just starting out.

I have never been exposed to the concept of buying directly. When dollar cost averaging this seems to be a great strategy to minimize costs!

Khürt Williams
Khürt Williams
11 years ago

Are you talking about something similar to ShareBuilder.com?

DavidV
DavidV
11 years ago

I’m an index investor, but I own index mutual funds rather than spyder’s because of my relatively small purchases. I invest $150-$200 every two weeks, when I get paid, into the market. As is stated in this article, I didn’t want to pay the brokerage fees for to buy spyders. With these funds, I do not pay any service fee to buy them, though I do have a 3 month holding period (I don’t buy to sell anytime soon).

I end up paying a higher MER, but I feel it works out because of the way I buy the funds.

Eugene Krabs
Eugene Krabs
11 years ago

Another nice article.

I think it should also come with the caveat that these plans are for taxable investing. To investing in an IRA requires going through a brokerage.

Tony
Tony
1 year ago
Reply to  Eugene Krabs

Not really. There are some Direct Stock Purchase Plans (DSPP) that offer IRAs. I believe, Altria (MO) at Computershare is one. There are others. You’ll have to do your due diligence.

ABCs of Investing
ABCs of Investing
11 years ago

I would agree this is the lowest $$ cost way to buy individual stocks however I’m not a huge fan of them: 1) It takes time – you need set up an account for each company. If you want to have a diversified collection of stocks then the time factor will add up. 2) Diversification – if you don’t have much money to invest then you will be far more diversified buying index funds. If you don’t have enough for the Vanguard minimum then save it up and open an account there. Once you have a large enough portfolio of… Read more »

Chris from St. Mary's
Chris from St. Mary's
11 years ago

This is interesting. Buying individual stocks is not something I’d want to do at this time in my life, but it’s nice to know that if I were ever interested, there’s an economical way of doing it.

Jacqui
Jacqui
11 years ago

Great of you to mention these – I’d totally forgotten about direct plans, even though I know that’s how my grandfather bought all his stocks.

We bought GE lately too. I’d never want stocks to make up a large percentage of our portfolio, but I think my husband will love this idea. Looks like you can make purchases with them monthly automatically, or as (in)frequently as you’d like. Too bad they don’t have the completely free plan!

Joe
Joe
11 years ago

How do you sell shares with this method? Do you just put in an order with the transfer agent and they execute the trade and send you a check?

jim
jim
11 years ago

They make money from you, by spread in the price that they quote your purchase at. The broker of these secondary/shelved offerings make at least 3% of the offer, some paid by the company, some paid by you, directly or indirectly

Ty
Ty
11 years ago

This looks like a promising idea, but only for those who are looking to invest in a small number of stocks. If one wanted to do this for, say, ten different companies managing it becomes the equivalent of managing ten bank or credit card accounts each with their own monthly statements and tax reporting information. Managing that could become overwhelming beyond a certain point.

MarkC
MarkC
11 years ago

For those who may not buy & hold forever, figuring cost basis for shares sold is not trivial, though if I can do it, anyone can. Though DRiPs were fun for a while, I’m back to index funds.

Thanks, M

tinyhands
tinyhands
11 years ago

@Khürt Williams: The principle of dollar-cost averaging is essentially ShareBuilder’s strategy, but ShareBuilder is still a broker for the transaction(s). Direct-purchase is just that, no middleman. With ShareBuilder, the purchase of additional shares is typically automatically scheduled. With direct-purchase, you MAY have to set that up manually. It depends upon the transfer agent. @Joe: In most cases, yes, the transfer agent can handle the sale. Read the fine print though, as there may be exclusions to when transactions are executed and how funds are remitted. It’s also worth pointing out that shareholders actually OWN the shares, regardless of whether they’re… Read more »

Linc
Linc
11 years ago

I like this idea in principle, especially for cheap ways to invest in other companies, but it still gives me caution to not control the stock purchase date. I have been doing this through my own company for some time and because the stocks are purchased on a given day, they just go at the available price and don’t do anything with timing. The stock may be 15% lower the day before and day after and sometimes even the same day. Seen it happen too much. Also the fees if you sell shares through Computershare at least are outrageous compared… Read more »

IstheRecessionOverYet
IstheRecessionOverYet
11 years ago

Thanks for the great tip! I had no idea that companies would let you buy stock this way.

R.D. Hammond
R.D. Hammond
11 years ago

If only there were a way to do this with index funds… *sigh!*

Allan
Allan
11 years ago

Meh…I think I’ll stick with index funds for my dollar cost averaging. That way there’s some diversity built in. Besides, if there’s an individual company I eventually decide I’d like to invest in, I’d rather purchase it at a known price all at once (more of a speculative for-fun investment, I guess).

RJ Weiss
RJ Weiss
11 years ago

Agreed with the above comment from ABC’s of Investing.

The plan is the best way to invest in individual stocks, but are individual stocks the best way for you to invest? Chances are you need to be more diversified.

Cathy
Cathy
11 years ago

Buying individual stocks is not the best plan for me. I’m not Warren Buffet, and I don’t have the networks to know the good stocks from the bad. This is gambling.

Lily
Lily
11 years ago

OT – this made me laugh! 😀
http://dlisted.com/node/31488

J.D.
J.D.
11 years ago

@Lily
Ah yes, my evil dopple-ganger. Actually, I’ve written to his production company twice to see if I can interview him. I think it would be hilarious to do so. 🙂

aa
aa
11 years ago

It’s just Sharebuilder DIY…

Chris
Chris
11 years ago

@ Sarah #4 Fee-only advisors are still salesmen.. Trust me. The problem is aligning their interests with yours. If you are paying a flat $300 fee or whatever, what is the advisor’s motivation to grow your account? You are paying $300 no matter what, right? I believe you can still be a “fee only” advisor if you charge a % of AUM, normally .5%-1.5%.. That makes a little more sense to me because the advisor’s payout is directly affected by the value of your account. You make more money, he makes more money.. Interests aligned. Now here is the real… Read more »

The Personal Finance Playbook
The Personal Finance Playbook
11 years ago

This is a great tip for saving money on trading fees. In my opinion, however, if you only have 50-100 per month to invest, it might be smarter to be putting that into a retirement account (likely a Roth under these terms) that’s invested in low cost index funds. Individual stocks are a great way to build wealth, but they’re likely not for everyone. It’s a good post though, with a good tip as to how to buy individual shares without your funds being eaten up by transaction costs.

Tyler Karaszewski
Tyler Karaszewski
11 years ago

The title of this article should be “Direct Stock Purchase Plans: A *Cheaper* Way to Invest”. I’d never use this method, personally, because it seems like way too much of a pain. I’d much rather just pay the $7/trade. If it’s that big of a percentage of your trade value, trade quarterly instead of monthly and reduce the fee by two thirds. Of course, I have no interest in buying individual stocks, anyway. It would force me to spend for too much time tracking and researching a lot of things I don’t care about, and would therefore be a big… Read more »

Josh
Josh
11 years ago

Thanks for the advice, I think I’ll work on reinvesting my dividends into buying more stock instead of letting it sit untouched.

Kevin
Kevin
11 years ago

This sounds good in theory, but I wonder how it actually works in practice. Not being able to decide the trade date is worrying, but I also saw no mention of trade price. Do they say you’ll get the market rate on the day of the actual trade. If they charge you more than the market rate, that’s a hidden fee. Secondly, and perhaps more worrying, is how you close these positions. When I sell, do they pick the date and the trade price as well? Seems like there’s the opportunity for more fees in this scheme. At least using… Read more »

Troy Tuttle
Troy Tuttle
11 years ago

If you really are buying to hold for the long term like retirement or college savings, then this is a horrible method. One time transaction fees are nothing compared to the tax consequences of quarterly dividends and long term capital gains over the life of an investment. You would be better off investing in a tax sheltered (IRA) CD earning 3.5%.

John
John
11 years ago

Great article! Glad to finally see DRIPs get some coverage. I’ve had them for years, my dad got me into them when I was a kid. Excellent way to teach kids about stocks.

BG
BG
11 years ago

I think it’s a very interesting idea, especially if you feel a connection to the company you buy shares of. However, I don’t have a clue if something similar is available in Europe/for Europeans. Does anyone have information about this?

Sam
Sam
11 years ago

Interesting info., not sure I would use this plan because we do our individual stock purchasing within our IRA, with a plan to conver to Roth IRAs in 2010.

Our 401ks are invested with mutual funds and index funds and we also have real estate investments. The monies we use to buy individual stocks in our IRAs is about 30% of our investment monies (not counting RE).

Mike
Mike
11 years ago

One downside of using direct purchase plans is the resulting influx of statements. It’s just so much easier to organize one statement from one broker and one 1099 from one broker than a stack of statements and a stack of 1099s from multiple plans. You may also have less liquidity.

Chett
Chett
11 years ago

J.D.

Have you ever wrote about the difference in the various types of financial planners?

There was some discussion above about compensation of fee only vs. commissioned based planners. There are also fee only planners out there who charge a fee based on someone income statement net worth, not their balance sheet or assets under management. It would be interesting to hear from both sides and how they present themselves, and the get the readers opinions of who is best, or looking out for the investors best interest.

SeekingLemonade
SeekingLemonade
11 years ago

This is all about dollar cost averaging. I do it. Have done it for about ten years. At this stage of my life, I reinvest all dividends. I do not do automatic investment monthly. I send in optional payments when I can. DRIPs are applicable ONLY after you fund your IRA and your 401K (if you have a job) and your Keogh (if you have one) and your emergency funds and your college funds, or whatever other normal savings vehicles you have, including mutual funds. IF and ONLY IF you have money left over, DRIPs can work. It does take… Read more »

Peter
Peter
11 years ago

As mentioned before, these programs give you terrible bid-ask spreads, hiding the true cost of the plan.

Tim
Tim
11 years ago

Great advise!! Spent all my money on Citi stock month ago!! 🙁 Hopefully it will shoot up soon.

Keep up the posting!!

RJ Weiss
RJ Weiss
11 years ago

@ Chett

There is really no right or wrong answer to which financial planner is best. Personally, I think a one-time fee eliminates many of the exterior motives, for the majority of people. However, it’s not right for every situation.

For example, what if the client just needed help with a rollover. Is that fair if a a planner charges him the same as someone who needs a complete overhaul? As you can see it can get pretty complicated.

Also, the conversation always leaves out the most important aspect, and that’s the quality of the planner.

No Debt Plan
No Debt Plan
11 years ago

This goes completely against the “low cost index fund” advice we see on GRS all of the time — specifically why, I think, JD mentioned this at the bottom of the post.

I would guess that 95% of all people who own individual stocks have no business doing so. They should be in index fund. Set and forget.

FatFred
FatFred
11 years ago

A friend was just talking about a money manager site.
http://www.mint.com/
Have you seen sites like this and do they really help?
Thanks for all the tips!

FF

drip advice
drip advice
11 years ago

All DRIP plans are not created equal. Look at the fee structure and determine if it ora low cost brokage account would be your lowest holding vehicle.

MT
MT
11 years ago

I would like to re-emphasize the huge burden of tracking all of the stock information through DRIPS for tax purposes… if you notice on his statement, the company does not do it for you.

monthly (or even bi-monthly) stock purchases, plus quarterly dividends over an extended period can become quite a headache tracking your average share price, if you ever want to sell.

and if you are planning on doing something like this as a retirement substitute, consider tax-sheltered accounts first.

the tax savings alone beat the trading fees a million times over

DDFD at DivorcedDadFrugalDad
DDFD at DivorcedDadFrugalDad
11 years ago

I love DRIPs (Dividend Reinvestment Plans)– a very smart way to dollar cost average in to stocks . . .

DRIP Your Way to Investment Success http://divorceddadfrugaldad.com/2008/11/04/drip-your-way-investment-success.aspx

Lost
Lost
11 years ago

Not enough detail, not a very good article. I still no not understand how to go about this.

AF
AF
11 years ago

Telling people to buy and hold and blindly diversify is now considered bad advice. Please stop doing it.

“2008 was a devastating year for buy and hold investors. The classic barometer of stocks, the S&P 500 Index, declined 36.77%. The normal benefits of diversification disappeared as many non-correlated asset classes experienced large declines simultaneously. Commodities, REITs, and foreign stock indices all suffered losses over 35%” -Melbane Faber, A Quantitative Approach to Tactical Asset Allocation

Sandy
Sandy
11 years ago

I own shares in 14 different companies using direct purchase plans, it’s not that time consuming. Most send quarterly statements when dividends are paid. My children also have custodial accounts. My accounts also have a TOD, so I’m able to avoid probate with these investments. Most utility companies offer these plans & are a low risk investment. P&G also offers direct purchase & does stock splits on a regular basis. Companies also tell you when purchases are made, such as the 15th & 30th of the month.

Lost
Lost
11 years ago

Sandy,
can you give a step by step of the process with Coca Cola?

Sandy
Sandy
11 years ago

I looked up Coca-Cola(KO) on Yahoo Finance, there is a link to the company’s website. Once your on Coke’s website look under investor relations — it tells you what you need to know & links you with Computershare.com. Computershare.com has all the nitty-gritty details of costs & forms to either download or send for. When filling out the forms you can add TOD even if they don’t have an option for it. Hope this helps.

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