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?