Why Direct Stock Purchase Plan Still Makes Sense

I bought a lot of individual stocks in 2009 in my brokerage accounts, mostly with Scottrade. Many of them were purchased before the market hit the bottom (now we can safely call it the bottom) in March. But those stocks were not all what I bought last year. In addition to stocks purchased here and there, I also added two stocks, ExxonMobile (NYSE:XOM) and Boston Properties (NYSE:BXP), to my regular purchase list, all through Direct Stock Purchase Plan (DSPP) at ComputerShare. With the two additions, the list of DSPP stocks I buy regularly grew to 5, which also include Bank of America (NYSE:BAC), Procter & Gamble (NYSE:PG), and Progress Energy (NYSE:PGN). I will probably add more to the list gradually.

With so many discount stock brokers where I can buy unlimited number of stocks at only a few bucks of commission (such as OptionsHouse $2.95/trade and SogoTrade $3.00/share) at any time, you may ask why I still bother to use programs like ComputerShare to buy stocks. Well, the reason is quite simple: Because I think DSPP still makes sense, even when there are so many cheap alternatives including the two I just mentioned.

Investing with DSPP Is still Cheap

Actually, this is THE reason why I am still using DSPP, even though DSPPs usually involve more fees and most plans, if not all, impose a minimum investment for both initial and ongoing purchases. Unfortunately, most of them can be avoided by carefully choosing which plan to use. For example, a typical DSPP plan offered through ComputerShare charges such fees as Initial Setup Fee, Cash Purchase Fee, Ongoing Automatic Investment Fee, Purchase Processing Fee (per share), Dividend Reinvestment Fee, Batch Sale Fee, Batch Sale Processing Fee (per share), Market Order Sale Fee, and Market Order Processing Fee (per share). That’s a lot of fees comparing to buying stocks from most brokers which charge a flat fee for a buy or sell order, regardless the number of shares. However, not every plan charges so much fees. Otherwise, it wouldn’t make any sense to use DSPPs. For instance, when I joined ExxonMobile’s DSPP last year, I didn’t pay any fee. The only fee that I will pay later is the Batch Sale Fee of $25 and Batch Sale Processing Fee at $0.12/share. All other fees are waived and the company pays for dividend reinvestment. Since I am only buying $100 a month, I probably won’t own a lot of shares at the time when I decide to sell in the future. Thus, using XOM’s DSPP to buy the stock is an affordable option for me.

On the other hand, there are also plans like the Coca-Cola plan which charges $10 Initial Setup Fee, $3 Cash Purchase Fee, $2 Ongoing Automatic Investment Fee, $0.03/share Purchase Processing Fee, and 5% of amount reinvested up to a maximum of $2.00 for dividend reinvestment. I will definitely stay away from plans loaded with fees.

Get Free Dividend Reinvestment

More and more discount brokers are offering free dividend reinvestment these days. Among brokers I am using, I know TradeKing and Zecco have such services, but not Scottrade. At Scottrade, dividends are paid as cash and if I want to use the distribution to buy more stocks, I will have to pay $7 commission for every purchase. Given the difference in return between with and without dividend reinvestment, it will be a big loss in the long term if dividends are taken as cash because the broker I use simply doesn’t offer free dividend reinvestment service. And having the dividend reinvested is the reason I buy those dividend paying stocks in the first place. With DSPP or DRIP (Dividend Reinvestment Plan), I can get dividends reinvested automatically for free if I choose to buy stocks from plans with free dividend reinvestment (not the Coca-Cola stock though). Even though stocks offered through places like ComputerShare are limited in quantity, but not so in quality. In fact, there are many high quality companies with rich dividend payouts. Investing in these companies with DSPP is a valid choice.

Automatically Invest in Good Market and Bad

When you buy stocks from a broker, you will pay a fixed commission for every order and you can only buy a round number of shares. For example, if you want to buy one share of Google stock (NASDAQ:GOOG), you need at least $540 to buy the minimum of one share at the current price. If you only have $100 to invest, then sorry, you will have to look for something else that’s cheaper in price because no broker will sell you one fifth of a share of GOOG. This is not the case with DSPPs that I am using with ComputerShare. I basically set up an automatic investment plan for the stock I want to buy and each month a fixed amount money will be withdrawn from my bank account on a given day of the month to purchase the stock that usually gives me fractional shares. This whole scheme is a lot like what ShareBuilder is doing with its automatic investment plan, but in a much cheaper way. With ShareBuilder, it will cost you $4 for each investment. When you choose a DSPP with no ongoing automatic investment fee like the XOM plan I mentioned above, there’s no fee involved in the transaction.

Actually, if you are familiar with dollar-cost averaging often used in mutual fund investing, the free DSPP automatic investment plan works in the same way, thus you get the same benefit: Buy the stock in good market and bad, no market timing of any sort. This is especially good for investors who can only set aside a small amount of money, say $100, to invest each month. Unlike mutual funds which usually require a minimal initial investment of $1,000 or more (most Vanguard funds require at least $3,000), DSPPs’ initial investments are much smaller, usually below $1,000, making it easier to buy stocks with a small budget than invest in a mutual funds (I am not talking about the risk of investing in individual stocks and mutual funds here).

Of course, DSPPs have their limitations. In you buy through ComputerShare, you have a limited number of choices because not every public company has a DSPP. Also, many plans do involve high fees that make them less appealing for regular purchases (like every month), plus the lack of flexibility to choose on what day you want to buy and the frequency you want to buy (with ComputerShare, you can only make monthly investment). But I feel these drawbacks don’t overshadow the benefits of using DSPPs.

Does investing with DSPP still make sense? It does for me. If you want to know more about buying stocks from ComputerShare, check out my ComputerShare review post to learn more about the process.

Photo credit: jm3