Investing > Direct Stock Purchase Plans

Direct Stock Purchase Plans

DSPPs have been around for a long time, but do they still have a place in a changed, mostly net-based market?

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Updated May 20, 2021

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Do you like paying extra—for anything?

If you’re like me, that answer is a hard no. 🚫

Direct stock purchase plans (DSPPs) have always positioned themselves as the great value investment option—lower fees than brokers, dividend distribution, strengthened relations between company and shareholder, discounts…

However, this has greatly changed with the advent of zero-commission online brokers like Robinhood. Many of the great appeals of DSPPs have been rendered mundane, while their drawbacks—like hampered diversification potential—have stuck around.

Still, many companies do offer them, and they remain the right choice for some investors—DSPPs are still the most direct way of investing in a particular company, and if you manage to discover a new, nascent Apple, this investing method might come with immense returns.

So, let’s dive in, and find out everything you need to know about DSPPs.

Ready? Let’s go! 🚀

What you’ll learn
  • What are Direct Stock Purchase Plans?
  • Understanding DSPPs
  • How Companies Benefit from DSPPs
  • Key Features
  • Which Companies Offer DSPPs
  • Pros and Cons
  • Assessing a DSPP
  • DSPP vs. Using a Stock Broker
  • Where to Buy DSPP
  • Conclusion
  • FAQs
  • Get Started with a Stock Broker

What are Direct Stock Purchase Plans? 📖

Direct stock purchase plans (DSPPs) are a way for an investor to buy a company’s stock without going through a broker. They tend to come with few, if any, fees, often offer discounts, and usually go through a transfer agent. In this day and age, probably the biggest transfer agent is Computershare.

DSPPs offered great value in the age before online brokers as they were by far the cheapest way of buying stocks, and while full-service brokers still tend to be pricey, this benefit is mostly negated by the affordable nature of premier online stock brokers. Additionally, not all companies offer direct stock purchase plans.

Still, DSPPs can be a real way to go for the long-term investors as they offer great dollar-cost averaging and tend to be years or even decades-long investments. This can ultimately lead to great results—trading can be more exciting, but you want stability when your 401(k), or down payment savings are on the line.

Understanding Direct Stock Purchase Plans 💡

DSPPs enable individual investors to open an account used for buying a company’s stock. These purchases are often monthly and can even buy fractions of a share. This means that you don’t really have to min-max the amount you invest—no matter how little or much money you allocate, you always end up buying something.

A Matter of Time ⏳

On the other hand, truly min-maxing isn’t really possible—you don’t get to decide when your money is invested. After you place a purchase order, it takes time to process, so there isn’t much control over the share price at the time when the transaction is made.

This might appear bad, and it can be, but direct stock purchases are mostly set up with the long-term in mind. This means that over the years of investments any individual price you pay loses its significance—overall you always pay the average stock price of a given company.

Just to make an example: If a company you are investing in has an average share price of $20 in a year and $22 in a decade, it doesn’t really matter if you pay $18 in January, $26 in February, $22 in March and then $15 in April of any given year—you still spend about $20 per-year per-share and $22 per-decade per-share on average every month. 

Ultimately, it is possible to make unbelievable amounts of money thinking long-term. In fact, some economists say that the most successful investors are those that set up their account and then forget about it for a while. 

There are quite a few stories like this, for example, one guy set up a DSPP with Home Depot two decades ago, and found out he made $128,000 by forgetting about it. This is because the market is both on a steady rise—ever since it first opened—and hard to outperform.

Just look at the big crashes—the crash of ‘29, the dot-com bubble, the housing crisis—many people lost a lot of money, some companies went under, but the market recovered and kept growing—and the people who were thinking long-term, and had decently diversified recovered with it. 

A Gift that Keeps on Giving 🎁

Another reason DSPPs are good for long-term investment is that some of them pay dividends. Dividends represent a payment a company gives to its investors, usually if it is doing good, usually quarterly.

For example, Apple pays quarterly dividends that have been hovering around 20 cents per share in the first half of 2021. That means that if you own 100 Apple shares, you would have gotten around $40 from the company by May of 2021—$20.5 in January and $22 in April.

While these numbers might seem trivial to some—especially since Apple’s share prices tend to be well over $100 a pop—keep in mind that you should be aiming at long-term investments. Even tiny percentages can turn into significant gains given enough time. 

Furthermore, many economists are expecting more dividend payouts as the economy keeps improving. This makes dividend investing a very viable strategy, and dividends themselves a force to be reckoned with.

Often, companies will offer dividend reinvestment plans (DRIP). This option allows you to automatically reinvest your dividends back into your DSPP—hopefully helping the firm, yields, and ultimately the value of your shares grow.

Note that companies often set maximum annual investment caps for individual investors. For instance, Johnson & Johnson’s cap is at $50,000, while Coca-Cola’s is much higher at $250,000. 

How Do Companies Benefit from DSPPs? 🔎

DSPPs often come with affordable buy-in prices. These represent the money you have to put down as your first investment and tend to be between $25 and $2500. Thus, direct stock purchase plans can help a company bring in otherwise reluctant investors—or perhaps investors who otherwise couldn’t start investing. Moreover, they are a cheaper way for a firm to raise additional funds in a pinch.

These plans also help the investor build their position as a serious shareholder of a company over time. For the company, this means that they have a base of monthly investors that are likely to stick around and keep investing over many years. 

Such a system makes it easier for a company to raise funds when issuing new stock. It can also be viewed a bit as a form of diversification. If a company is popular among big investors, small investors, day traders, and so forth, it ensures its relevance on the stock market—which is itself an indicator of the company’s overall performance.

Key Features ⭐️

As we’ve mentioned before, a major feature of DSPPs is the low initial investment required. These usually range from as low $25 up to $2500. However, no matter how low the mandatory investment is, it is advisable to invest at least $500-1000 since even the lowest fees and commissions can still take a noteworthy chunk of a small investment.

DSPPs are great for a fire-and-forget approach. You can make your investment by check, true, but you can also set up monthly automatic transactions. If you are not happy with your initial approach, you can always modify it along the way, adjusting the amount as well as the payment method.

Since you can buy fractions of shares, automation is even more convenient—no need to worry that money will be wasted. If a share costs $36 and you invest $50 every month, you still get those additional $14 invested. This just goes to further the practicality of DSPPs when it comes to automation.

Another cog in this machine is the ability to reinvest dividends automatically. While lower fees are a major feature of these plans, they still exist. They chiefly consist of:

  • Setting up the account—tends to be in the $5-20 zone.
  • Buying—mostly $0.03-0.10—and selling shares—usually with a $15 selling fee, plus $0.12 per share.
  • Reinvesting the dividends which tends to come at 5% charge up to a maximum of $2.
  • Low initial investment mostly ranging from $25 to $2500.
  • Manual and automatic monthly payments via checks, bank debit, or a combination of the two.
  • DSPPs often pay dividends to their investors. These dividends can also be set up so they are automatically reinvested into the company.
  • The ability to buy fractions of shares—no matter how much money you set up for monthly investments none of it will just sit idly because it can’t buy an entire share.

However, DSPPs also have a few negatives when it comes to pricing. These include low yet existent fees and commissions—for one, setting up an account tends to be in the $5-20 zone.

In most cases, buying shares will incur a $0.03-$0.10 commission, and selling can include a $15 selling fee plus a commission of $0.12 per share. Also worth noting is that reinvesting dividends tends to come with a 5% charge up to a maximum of $2.

What Companies Offer Direct Stock Purchase Plans? 👇

Now that we know what DSPPs are, and how they work, let’s take look at some examples in no particular order:

1. Walmart offers a DSPP with a rather high set-up fee of $20 and a $0.05 processing fee per share. However, they incentivize dividend reinvesting as it doesn’t incur processing fees. Walmart also requires an initial investment of $250 that can be spread out as 10 automatic payments of $25. Walmart is also a company that pays regular dividends and has even raised them to $2.16 annually per share in 2021.

2. ExxonMobil requires a rather high initial investment of $250. However, they have no purchase fees and also boast a long history of dividend payouts. Exxon usually pays dividends four times a year and it amounted to $0.87 per share in March 2021. However, they do charge fees upon sales.

3. Amazon demands an initial investment of $250 without the option to spread this into lower, consecutive payments. They have a yearly cap of $250,000 and charge processing fees of $0.05 per share. However, Amazon neither pays nor intends to start paying dividends.

4. Pfizer offers a DSPP that requires either a $500 initial or 10 monthly $50 payments. They have a rather large dividend investment fee cap of up to $3. The maximum annual investment is $120,000 and Pfizer’s annualized dividend rate is $1.56 per share.

5. The Coca-Cola Company has a buy-in price of $500—the same as Pfizer—and a once-off set-up price of $10. Their stock processing fees are a bit lower than both Walmart’s and Amazon’s sitting at $0.03. Coca-Cola dividends are also paid quarterly and have an annualized rate of $1.68.

Good and the Bad with DSPPs 👍👎

Pros

  • Low fees
  • Good for both manual and automated long-term investments
  • Potential for high dividend yield
  • Potential for discounts

Cons

  • Poor diversification
  • Likely dubious liquidity
  • Access to shares of only one company
  • No control over the exact day and hour of transactions
  • Dividends can incur unfavorable taxes

As you can see, DSPPs bring both advantages and downfalls to the table. Now that we’ve had a brief overview, let’s take a deeper dive to understand what we’ll run into—and what to watch out for.

Benefits of DSPPs ✅

DSPPs are by their nature a great way to heavily buy into a single company, or a select few you like—this long-term strategy can be further bolstered by investing in blue-chip stocks—stocks issued by large, stable companies with a long history.

The beginning of 2021 has proven in a major way the power of social media over prices—something the Federal Reserve has issued stern warnings over. This holds true both for traditional stocks as highlighted by the Gamestop debacle—and for the newer crypto market. Just think how Elon Musk’s tweets have affected the prices of both Bitcoin and Dogecoin. 

Blue-chip stocks are by their very nature more resistant to volatility and it is unlikely that they will lose trust garnered over many years from a weeks-long anomaly caused by Reddit or tweets.

While this strategy grants a great level of security—and will overall bring you decent profits—you could also invest in a newer, unproven company you have a great deal of confidence in.

Still, it is wise not to get carried away by prospects of such massive earnings. There were many companies just as promising in the late 90s yet most of them were wiped out when the internet bubble burst. 

While there are signs you can use to spot a new bubble, overinvesting in risky stocks is a game for the very brave, and we dare say, the very stupid. For an added layer of security, you could try investing in preferred stock

When it comes to the distribution of a firm’s assets, preferred shareholders are second only to the company’s creditors—but these stocks make sense only for certain investors with a specific strategy in mind.

A far more common strategy is diversification—the more varied your portfolio is, the more resistant it is. A very common way of easily achieving diversification is by investing in mutual funds.

Online brokers have mostly made the low cost of DSPPs null as an advantage over other investment vehicles, but they are still a benefit. This is especially true if you find a plan that doesn’t charge fees on purchasing stocks.

Limitations of a DSPP ⚠️

Chief drawbacks of DSPPs are low liquidity and low diversification. Since liquidity determines your ability to turn securities into cash, this means that you mostly can’t rely on illiquid assets if unforeseen financial trouble hits and you need to sell quickly.

On the other hand, this shouldn’t be a major concern as, once more, DSPPs should be generally invested in as a part of a long-term strategy.

Diversification is a whole other issue. Essentially, it boils down to buying shares of as many different companies in as many different fields to ensure your savings are able to withstand all but the most devastating market storms—which are thankfully very few and very far between.

The bottom line is that you only get to trade one company’s stock through a DSPP—it certainly is possible to diversify your portfolio using only these plans, but it would take a lot of time and effort. Precisely for this reason, ETFs, as well as the more traditional mutual funds are becoming more and more popular with investors.

How to Assess a Direct Stock Purchase Plan 📊

The first thing you should do when assessing DSPPs is decide on your investment strategy. If you believe that a company is going to grow significantly in the coming years you could try and get as many shares as you can while they are still undervalued

Bonus points if your shares are from a company that is already stable—even if you don’t get returns you were aiming at, you won’t have to watch your life savings crash and burn.

If you are simply looking to protect your money from inflation, you could find stocks that have a long history of stability, and regular dividend payouts. However, if this is your aim, a mutual fund or an ETF might be a better choice as the diversification they provide functions as an additional safety net. 

You really shouldn’t be lazy when it comes to assessing stocks.  Back in 2015, there has been some controversy around an alleged Fidelity study showing that their best investors were either dead or inactive—a study that, by all accounts, never even happened.

Still, making a good selection of stock and then buying and playing dead can be a solid strategy—as highlighted by the aforementioned Home Depot “forgetful” investor. However, even when investing passively, it is advisable to check your portfolio every so often.

Once you find stocks that perform the closest to what your goals are, it’s time to compare them. As we’ve mentioned before, while DSPPs position themselves as the low-fee option, it isn’t always the case. 

If you have $500 total to invest—and are looking for a company with decent growth potential—a plan with a minimum investment of $500, a set-up fee of $20, a transaction fee of $0,05, and a share price of $15 is probably not a real option. 

These problems can be compounded further if they charge a high percentage on dividend investing. As all those added fees can really eat into both the money you invest and your ultimate returns so you want to pick a plan that charges the least.

DSPP vs. Using a Stock Broker ⚖️

In this day and age, using an online broker is better than investing in a DSPP in almost every way. More than anything, popular discount brokers have nullified the DSPP’s advantage in pricing. They often have fees per share as low as $0.005 on standard trading platforms.

Another advantage of using a broker is exposure to numerous different stocks on the same platform. This is in stark contrast to DSPPs that only allow you to invest in only one company with each plan. 

When it comes to the ease of assessment of the stocks you are purchasing, brokers also have a slight edge. They often come with free, built-in research tools so you can easily get informed before making a decision.

💡 FYI: Online brokers, even “free” ones, often have minuscule hidden fees so, as always, it is important to read the fine print in their terms & conditions. 

Furthermore, while DSPPs have a bit of a liquidity problem, especially if you need to sell quickly, brokers allow you to quickly and easily sell off (or buy) your shares. 

Still, DSPPs do offer a fair bit of automation, so if you are happy with investing heavily and long-term into a single company, there really isn’t a reason to avoid them.

Another reason why you might want to set up a DSPP for some of your investments is to diversify your investment avenues. While you really shouldn’t go overboard with this approach, it is not a bad idea to untether yourself from a single brokerage.

You never know when a platform might change some of its rules, permanently or temporarily as Robinhood did amidst the Gamestop controversy.

Online BrokersDirect Stock Purchase Plans
Access to stocks of numerous companies from a multitude of countries on a single platformAccess to shares of a single company through individual plans
Low-costLow-cost
Good liquidityOften poor liquidity
Easy to set-upEasy to set-up

Where to Buy Direct Stock Purchase Plans 🗺

Buying a DSPP is pretty straightforward as long as a company has it on offer. Typically you’d go to the FAQ section of their website since that is where they usually have information for would-be investors.

This step will likely lead you to Computershare, a transfer agent. However, Computershare handles so many DSPPs that you could probably go directly to their website and search for a company you are interested in.

Once you find what you are looking for, you will need to either login or register. This is a simple process and will consist of the usual suspects: you will need to enter your social security number, or your EIN, your ZIP code. There is even the trusty old captcha challenge before you proceed.

After you complete registration and confirm your email, you can start investing. Obviously, this means that you will have to set up yourself with the desired plan. This will include putting down a minimum required payment and selecting your desired recurring investment amount. 

Now you are all set and can watch as your share in a company grows.

Conclusion 🎯

Direct stock purchase plans have been outclassed in many ways by various modern avenues of investing. There is little doubt about that. Still, there are few better ways to really build up your investment in a single company—something that can prove incredibly lucrative if you stumble upon a new Microsoft or Amazon.

Furthermore, while their edge in pricing over brokers is dulled, it is still not broken. The fact that fees on other platforms have dropped doesn’t really mean that DSPPs are less cost-effective than they were.

Direct Stock Purchase Plans: FAQs

  • What is Amazon DSPP?

    Amazon DSPP is Amazon’s direct stock purchase plan. It allows individual investors to buy Amazon’s shares without going through a middle man. Amazon has never paid dividends, nor does it plan to. This can be a blessing in disguise as it means you don’t have to pay taxes on this type of payout. 

  • Do You Pay Taxes on DRIPs?

    Even though investors don’t receive cash from DRIPs, they are still considered income and are therefore taxable as income. Capital gains from stocks held in DRIPs are however calculated only once the stocks are sold—often years down the line.

  • How Many Shares Should a Beginner Buy?

    You should generally try and invest in at least 10 to 15 different stocks as this will go a long way when diversifying your portfolio. When it comes to the actual value of your initial investment, you can go as low, or high as you wish, but should try to make it at least $500—this will minimize various fees eating too much into your actual investment. 

  • What are the Best Stocks to Buy for Beginners?

    This will entirely depend on your risk tolerance. However, it is generally advisable to stick to blue-chip stocks—that is to say stocks of big, stable, well-established companies. This will minimize the risk of you losing all the money you chose to initially invest.

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