Direct Stock Purchase Plans (DSPP)
Direct Stock Purchase Plans (or DSPPs) are a great option for those individuals who know what investments they want to purchase and want an automatic and easy way to purchase stock through the company who is issuing them.
What is a DSPPs?
DSPPs allow you to directly purchase stock from the company without a middle man (e.g. Fidelity, E-Trade, Etc). An example of a company you may want to invest in is McDonalds. To do so, you can head to there website here (this is not an endorsement, this is used as an example, I do not own any direct shares in McDonalds) and sign up for their direct stock purchase plan through their transfer agent Computershares.
What fees are associated with DSPPs?
In this case, Computershares requires that the minimum investment is $500 for new investors (this is what you have to start with) or $50 per month for 10 consecutive months (this is their way of making it accessible with a lower investment amount, but you’ve got to stay in it for 10 months to get to your $500 minimum).
There CAN be some fees associated with this method. In our case, to purchase into McDonald’s DSPP we would incur an initial set-up fee of $5.00 plus a $5.00 one-time investment fee and a $0.05 per share processing. When we receive dividends and want the company to reinvest them, Computershares charges us 5% of the dividend for a maximum of $2.00 (so if we received $200 of dividends, we would only be charged the lesser of $10 - 5% of $200 or $2.00. In this case $2.00).
However, there are companies who will pay the fees on your behalf for instance Union Pacific, Baxter, Chesapeake Energy, ConocoPhillips, Hess, Goldman Sachs, and many others.
Why invest using DSPPs instead of a broker?
One of the biggest reasons why I use DSPPs is because DSPPs allows you to buy fractional shares. You can buy fractional shares because the investments are based on dollar amounts you want to invest in, not the number of shares you are looking to buy.
When I need to budget for investing, I don’t do it by the number of shares I want to buy, I do it by dollar amount (check out my investing challenges on this method of purchasing). Many brokerage firms want only whole share purchases no fractional shares. This can be hard when you have $50 and the stock costs $300. You would need to wait until you had $300 before you can invest in the stock market. When you use a DSPP I can tell Computershares to execute a purchase in the amount of $50 for X stock every month.
Another big reason I like this investing method is the ease of continuously purchasing of a stock on a frequency basis and Comptuershares does all the work. Set it and forget it. Unlike many trading platforms, you have to go in each month and schedule the investment and make sure you have enough money to satisfy that order (e.g. $300). By using Computershares, I just tell them to invest $50 a month and you’re done.
There is risk in this strategy. DSPPs do not work in real time. If you want to sell right now, you can’t. With DSPPs they buy and sell in batches and you don’t control when those batches sell. For instance, it might be 2 pm each day. So if you execute a trade at 9 am, it won’t trade until 2 pm. If you execute the trade at 3 pm, it may not be until 2 pm the next day. If you are trying to time the market, this isn’t for you. You are at the mercy of the batch trading.
DSPPs are usually only available for individual corporate stocks, not mutual funds and index funds (although there are other methods to set-up something very similiar to DSPPs). This can be a hindrance for someone who is set on investing only in index funds.
So, are DSPPs in your future?
Again this is just one of many methods to investing. This may not be for everyone, but for those of you who (1) want to invest a little at a time. (2) you know what companies you like and (3) can stand the roller coaster of the price swings, this may be an option.