Guide to Direct Stock Purchase Plans & Dividend Reinvestment Plans

Direct Stock Purchase Plans DSPP and Dividend Reinvestment Plans DRIP are a very popular and easy way to invest. They are old fashioned but they are perfect for young people because they allow us to invest small amounts over time – dollar cost averaging – without the brokerage fees.

Many famous companies like Ford, Microsoft, Johnson and Johnson, Disney, Walmart, McDonalds, etc. offer a DSPP. Almost 1,000 other companies now offer them and corresponding DRIP These plans allow potential investors or current shareholders to buy stock directly from the company often at their expense, instead of using a broker.

What are Direct Stock Purchase Plans DSPP?

Direct Stock Purchase Plans or DSPP are plans through a holding company such as BNY Mellon or Wells Fargo that allow you to buy the shares of a company directly. They hold the shares on your behalf much like a bank does of your money. Sometimes they require that you own a certain number of shares to start, but most allow you to be a first time buyer.

You can buy one share at a time or invest a certain amount of money to buy fractional shares. Yes, you can own 10 1/2 shares of a company’s stock.

DSPP are not exclusive to individual company stock, but are available across the whole spectrum of securities such as closed end funds, mutual funds and extended trade funds ETFs.

What are Dividend Reinvestment Plans DRIP?

Dividend Reinvestment Plans DRIP are plans that allow you to use your dividends to buy more shares of stock. Many established companies pay a dividend on an annual basis. If you take the dividend in the form of a check the money is taxed. However, if you put it in a DRIP the money is not taxed and you are able to realize higher gains by buying additional shares.

Dividends are usually in such small amounts, 2-5% which is often realized as penny’s per share, hardly enough to get excited for the paychecks.

But DRIP are valuable because you can buy additional shares with your dividends that are in the form of fractional shares. These can be compounded over time to realize substantial gains. This is a way of investing other peoples money. When it comes time to sell you can still trade fractional shares.

DRIPS are often associated with DSPP because many companies allow you to buy shares direct and then offer a DRIP program for your dividends. Some though only offer a dividend reinvestment program.

Like DSPP, DRIP also offer a variety of securities options, including mutual funds and ETFs.

What are the benefits of DSPP and DRIP Investing?

DSPP and DRIP are beneficial because they allow you to put money in the stock when you can whether that is weekly, monthly or whenever you have the time and money. They also give you the option of reinvesting dividends instead of taking the money. This compounds your gains and over time can make you very rich.

Investors also appreciate the use of dollar cost averaging in their investing. Rather than watch the daily ticker and trying to buy at the lowest points, dollar cost averaging buys on a consistent basis, thereby averaging out the price on the highs and lows. This is best for investors who are not trying to beat the market, but appreciate long term holdings of valuable companies.

What are the Risks of DSPP and DRIP Investing?

Investing in DSPP and DRIP often does not allow you to trade shares of the stock in real time. This can be dangerous for someone buying into a volatile and fast changing company. Planning to buy shares at a designated price and then watching them sky rocket before your buy is placed can mean only receiving a fraction of what you thought in value.

The same can be true for selling. If you sell when you think the price is in your favor and the trade is not placed at that time you might be watching in horror as the stock price plummets below your expectations.

These two problems can be reversed to a certain extent as many shareholding companies allow you to buy or sell at a real time price, significantly higher than the normal fee for trading. This would be valuable if you own a large number of shares.

Who are DSPP and DRIP Designed for?

DSPP and DRIP investing plans are designed for investors with long term goals or those who have trouble investing with a broker. If you have problems getting sleep at night worrying about your brokerage account, DSPP and DRIP plans are for you.

With these direct investing plans investors choose companies that are far more reliable and are not going to be missing the next day. Although there are a growing number of growth and small cap stocks available in direct investing, most of them a tried and true blue chip stocks.

DSPP and DRIP investing plans are also great for those who cannot afford to buy thousands of dollars of shares at a time, young investors. We can invest dollar amounts such as $50 when we please. This also allows us to not get eaten alive by the brokerage fees. Keep in mind many DSPP and DRIP plans do have fees, but many of them are affordable and worthwhile.There is also a growing list that feature no fees at all!

What is the Best Strategy for Investing in DSPP and DRIP?

  • Do your research on the companies and be sure they are companies whose securities you will not mind holding onto for more than a few years
  • Double check all fees – Some DSPP and DRIP are more expensive than a brokerage, some are completely free – Avoid the most amount of fees you can
  • Dividend paying stocks will often offer you a better yield
  • International stocks are becoming more and more available in DSPP and DRIP plans – do proper research as some are in hostile economies like China.

Where Can I Set Up a DSPP and DRIP Account?

The shareholder services available through these holding companies will give to you the vast exposure of direct investing:

Remember you are not investing in these companies, but these are the holding companies who each offer hundreds of DSPP and and DRIP.

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