DSPP’s Vs. DRIP’s
Direct stock purchase plans (or DSPP’s for short) are plans that allows you to buy stock directly from a company or their stock transfer agent – often times without a fee – and sometimes at a discount.
You can even set up a DSPP to automatically purchase and then reinvest through a dividend reinvestment plan (or DRIP). Quick note on that: DSPP’s are how you buy in to a company’s shares, regardless of whether they offer dividends to be reinvested. DRIP’s are plans that allow you to reinvest your dividends from company stock you already own in to more shares (in other words, you are an existing shareholder).
DSPP’s can offer DRIP options, if the shares pay dividends.
How to Buy in to a DSPP & DRIP
Buying stock through a DSPP or DRIP was/is fairly straight-forward:
- Find the stock you want to buy.
- Enroll in their plan (information on where and how can be found on the “investor relations” section of a company’s website, if they have a DSPP).
- Automatically buy and/or reinvest dividends through a DRIP in to more shares of stock (if that company offers dividends).
Sounds great, right?
It was – prior to the advent of a series of tubes call the “Internet” and the online discount brokers that were birthed from those tubes. Back before the early days of online stock investing you had to pay significant trading or management fees to full service brokers if you wanted to purchase stock. DSPP’s (if you could find them, which wasn’t easy without the tubes) allowed investors to bypass the middle-man brokers completely. And mutual funds, back in the day, had ridiculous expense ratios! DSPP’s were a pretty sweet deal.
In some cases, DSPP’s still are a great option. But while their concept remains appealing, DSPP’s are no longer quite so functional in today’s reality. Even if you don’t have to keep track of paper certificates anymore.
The Drawbacks to DSPP’s
There are many:
Lack of Diversity: unless you are enrolled in dozens of them across multiple industries and internationally, or have most of your investments in index funds, mutual funds, or ETF’s – you may be inadequately diversified with your investments. In fact, just about any stock purchase – direct or broker – runs this same risk. You have to diversify – and DSPP’s, on their own, typically won’t cut it.
No Fees? Not Exactly: DSPP’s are rarely a free lunch. Many charge initial setup fees, and some charge for each purchase transaction, sales fees, and more. Usually these fees are low, but they can really add up over time, particularly if you are slowly and automatically adding to your position. ALWAYS read a DSPP prospectus to see what fees you might be charged.
Lets take a look at Home Depot’s DSPP fees, for example:
“For each transaction, a small service charge is deducted from your investment plus the pro rata amount of brokerage commissions (generally 5 cents per share for purchases and 15 cents per share for sales). Service charges are:
- For first-time investors – $5.00
- For subsequent purchases – 5% up to maximum of $2.50
- Sales $25.00″
Hot damn! Think that looks bad? How about Fedex’s DSPP fees?
- Initial Setup Fee: $10.00
- Cash Purchase Fee: $5.00
- Ongoing Automatic Investment Fee: $2.00
- Purchase Processing Fee (per share) $0.03
- Dividend Reinvestment Fee:
- 5% of amount reinvested up to a maximum of $3.00
- Batch Sales Fee $15.00
- Batch Sales Processing Fee (per share): $0.09
- Batch Maximum Sales Fee: N/A
- Market Order Sales Fee $25.00
- Market Order Processing Fee (per share): $0.12
- Market Order Maximum Sales Fee: N/A
Note: Please consult the plan documentation for further details on fees and commissions.
There’s more? Sweet bastard!
- Initial Setup Fee $10.00
- Cash Purchase Fee $5.00
- Ongoing Automatic Investment Fee $1.00
- Purchase Processing Fee (per share) $0.03
- Dividend Reinvestment Fee 5% of amount reinvested up to a maximum of $5.00
- Batch Sale Fee $15.00
- Batch Sale Processing Fee (per share) $0.12
- Batch Maximum Sales Fee N/A
- Market Order Sale Fee $25.00
- Market Order Processing Fee (per share) $0.12
- Market Order Maximum Sales Fee N/A
For #@$%’s sake!
Contrast that with commission-free ETF trading paired with super low expense ratios of 0.05 – 0.4% from a company like Vanguard, and it’s hard to see the cost benefits of DSPP’s, if any.
Record-Keeping: Investors in DSPP’s and corresponding DRIP’s must keep track of the cost basis for tax record-keeping purposes in order to calculate capital gains taxes due. And these records can quickly overwhelm. Lets say you are invested in 10 DSPP with DRIP plans over a period of 20 years. The DRIP’s all reinvest dividends quarterly. The result would be 810 share batches (10 x 20 x 4 + 10), just on the initial 10 purchases and quarterly dividend re-investments alone. Any additional automatic purchases would tack on more batches to keep track of.
Uncertainty on Trading Date & Price: When you make a new purchase through a DSPP, you won’t have any control over the price it is bought at. Some purchases may take weeks. Discount brokers, on the other hand, allow you to trade in real-time – so you always know the price.
DRIP’s and DSPP’s: Buying or Selling?
Have I taken some of the luster away from DSPP’s? Good. There may be some out there with discounted reinvested dividend purchases or extremely small fees (you can do a search through stock transfer agent administrators Computershare’s and AmStock’s DSPP & DRIP lists) – but in most cases, you will probably end up paying more in fees than you would have investing in commission-free ETF’s, index funds, or even purchases of stock through a discount broker. Throw in the extra hassle associated with finding, buying/selling, consolidating, and record-keeping – and it’s a struggling value proposition in today’s investing world.
For those reasons, I’m not a believer in DSPP’s & DRIP’s.
DSPP & DRIP Discussion:
- Have you bought in to DSPP’s and DRIP’s? In your estimation, was it worth the hassle?
- What DSPP/DRIP plans have you invested in and why? What were the associated fees?
Interesting article. DSPP’s and DRIP’s are always built up as smart, cost effective ways to invest. That may have been true at one point, but as you’ve pointed out, that doesn’t seem to be the case anymore. Good expose!
I haven’t heard of these before, but like you mentioned, these aren’t a smart investment regardless since they’re only one stock. Even if they were incredibly easy to purchase, easy to record on tax documents, and had no expenses, not worth it due to the inherent risk of buying only one stock. I see absolutely no reason to invest in one of these over something like Vanguard or Betterment. Heck, I’d actually recommend an expensive, actively managed mutual fund over most of these due to the diversification if low-cost, passively managed funds like Vanguard were off the table.
I haven’t heard of DSPP’s, doesn’t seem like a smart way to invest with what the discount brokerages have provided us.
Beyond that, my company does offer an Employee Stock Purchase Plan (ESPP), same concept applies to DSPP, except the company offers a discount to purchase. From there, shares are put into my online brokerage account (no expenses for that transaction). My company also offers dividends with a DRIP (They now just have the primary option to receive the quarterly dividends as additional shares – no tax implications).
From this perspective, I’ve found this avenue a fairly hassle free medium for investing. Yes, it requires additional effort to ensure an appropriate level of diversification exists, but call me old-fashioned in proudly maintaining some shares from the company I work for.
Yeah, ESPP’s are a totally different story, because you can actually buy stock at a discount and without all the transaction fees. Just make sure you don’t get too over-allocated towards your company’s stock – it gives new meaning to having all of your eggs in one basket.
I would have to disagree with the comments. I believe DSPP and DRIPs are a good suppplement to a retirement plan. I do not think it is a good basis for majority of your retirement income, however it can be a good supplment to a low cost index fund. I currently am invested in 5 different companies through DRIP plans, all of which use Computer Share as their agent. In order for a DRIP to be worth your while you need to fully research the companies on your own which can be time consuming. I am currently invested in: AT&T, Exxon, GE, Coca-Cola and PG. I will only invest in DRIP plans if the meet a few criteria. 1. The company has to be a blue chip company and have been around for around 100 years. 2. The company must be listed on the S&P 500 and be the #1 or #2 company in their respective industry. 3. The company must pay a dividend and have raised dividends consistently over the past 10-15 years.
Following these rules that I have established for myself, I virtually have eliminated most of the big companies that our generation wants to invest in, IE. Google, Apple, Amazon etc.
Another perk of DSPP is after you purchase your first share, if you only have $25 to invest, you can purchase $25 worth of that company.
Are DSPP and DRIPs a good plan for the basis of your retirement funds, no. However, through the rule of compounding and dividend reinvestments, I believe a good nest egg will be built after 40 years, especially if you make a few purchases here and there and then forget about it until you are ready to retire.
I mostly agree with G.E.’s assessment. These plans are almost relics of a bygone era when mutual funds represented a cost effective solution compared to $50+ brokerage commissions. Now there are plenty of commission-free alternatives, and you can buy individual stocks cost effectively at Motif for $10/basket and at Loyal3 for free. (Their selection is small, but you’ll actually recognize the names, and you can invest in Berkshire Hathaway).
There are a good number of no-fee purchase plans (usually there are fees to sell, but the whole idea here is to hold for the long term). Computershare makes them easy enough to find by going to Company Research – Plan Search – No Fees. Here’s the direct link:
AST’s website seem lack any kind of search tool, so you would just have to peck and find there.
These plans can be a good way to develop a core of high quality, stalwart-type companies in your overall portfolio. As with any other investment option, avoid fees whenever possible!
I’ve been discovering the same costs-highly volumes mitigate some of them.I just looked into a program called Loyal3-no costs-limited offerings, for sure, but some occasional IPO participation-check it out-Will
Your article points out many items about DRIPs and DSPs (which are DRIPS once established) but I feel that you are only pointing to the negative side and omitting the benefits.
What wasn’t mentioned:
• There are over 270 companies that offer no fee plans
• There are also over 100 companies that have DRIPs that offer their stock at a
discount to that of the open market price which are usually in the range of
1-10 percent. This may also balance out any fees if they apply (all plans
vary). Some companies, however, only discount shares bought with
dividends, not new shares.
• Almost all DRPs allow dividends to be reinvested at no fee.
• Most companies do not charge for repurchasing shares. These are known as
Optional Cash Purchase Plans (OCPs). These plans often have low minimum
investments allowing flexibility to the investor,
As for the Disadvantages:
-Drips have the advantage of reinvesting and over time the investment can be advantageous; however, sticking to a plan too long can put too much money in one investment. To mitigate this is to diversify by investing a number of companies over time which is how all investment strategies need to be managed regardless of method.
Tracking your Cost Basis
It is up to the investor to keep track of the transactions to record capital gains. Each year all dividends are received whether reinvested or not. Keeping a log of this can be cumbersome especially if an investment is held over the long term especially as dividends are paid quarterly. There is no way around this, but for anyone that hold stocks or dividends outside of a DRIP they still have to do this work and also decide which block of shares to sell when they want to take money off of the table.
Synopsis: DRIPS can be the most low cost method out there and can be more advantageous if the research is performed. It just takes time like anything else. With respect to the Google and Facebook’s of the world that is true that these companies are not available to millennial population; however, there are great companies out there and if you choose to invest in some of them it won’t bother you when you’re making money.
Thanks for reading – David, from the Personal Finance Squad.
Thank you, David
I’m starting out again understanding certain stocks I’ve been following.
I worked with, Fidelity in California and also set up 401k. Long story short. I had substantial flow of cash and most was put in the 401K. Course it took time to accumulate.
So I’ll start with certain stocks, White Gold OBL; Weed, and three other stocks. Thank you for the info.
Yes, there are a lot of great stocks that are better owned through online brokerages, but there is a place for many in DSPP’s.
There are a lot of great DSPP’s that have $0 fees that are ideal if you want to put small amounts like $25 to $100/month automatically in the stocks. Yes, there may be a $15 setup fee, but you get that back after a couple trades.
For example AbbVie, Abbott Labs, Emerson Electric, Cracker Barrel Old Country Store, are Welltower examples of stocks I’ve automatically added to recently.
Others that charge $1 or $2.50 can work if you want to stay at 1% less for purchasing fees but still invest in the low $100’s and such DSPP’s include Home Depot, Costco, and CVS.
I usually keep 12 DRIPs and replace o-2 per year. They are diverse and usually beat the S&P 500 by a percent or so.
For me, regular automatic investing or scheduled occasional investing works best for me and DRIP’s are a key part of that: I retired comfortably at age 55.
My retirement income exceeds my needs and I still automatically add to my Abbott Labs DSPP as I’ve been doing since 1993, as well as stocks I feel are undervalued.
I have DSPP/DRIPS with 6 different blue chips, but with more and more companies charging higher fees, DSPPs are not as attractive as they used to be. However, benefits of DSPPs include: shares are held in your name (book name), so you’d never have to sell unless you wanted to, whereas shares held in a traditional brokerage account are held in “street name” (owned by the brokerage and assigned to you) and could be liquidated to settle debts if your brokerage firm ran into financial trouble …unlikely, but not impossible. Also, DSPP/DRIPS allow free, or very low fee, dividend reinvestment for shares held in an ADR account, which is helpful if you’re building up a portfolio with smaller monthly investments. Most brokers do not offer free dividend reinvestment for shares held in ADRs. Other than that, if I’m buying stock in a US firm, it’s usually easier to use a low-cost broker like Vanguard, Charles Schwab, or Fidelity since they offer free DRIPs on most US securities, and if you’re investing a few hundred to a few thousand dollars at a time, those $5-$7 one-time commissions are still a very reasonable frictional expense if you’re a buy and hold investor.
The prime advantages for many low to no fee DRIPs are:
1) Use your brain and select a good long term company to reduce long term risk.
2) They reduce long risk and force the investor to continue investing when the stock price drops whereas most investors hurt themselves as they get mad and sell when stock price drops.
3) Allow the investor to increase stock ownership over time and reduce risk of purchasing a large dollar amount and see price drop after purchase.
4) Allow investors to purchase several companies stock as entry fees (initial purchase amount) usually are relatively low, instead of purchasing a large dollar amount in one company.
5) If purchasing several companies stock, broker fees still add up.
6) Reduce the risk most investors suffer, purchasing large dollar amounts of one or two stocks that unexpectedly drop,investor gets mad and sells!
When, where and why do I have now have both DRS shares along with my common shares? Where did DRS shares come from?
need list of buyable stocks