Use Dividend Reinvestment Plans to Buy Stocks Cheap and Avoid Commissions

by Hank

I am a huge fan of buying stocks directly from the company and skipping the brokers’ commission fees. You can buy stocks without paying a commission to a broker by using Direct Stock Purchase Plans (DSPP) or Dividend Reinvestment Plans (DRIP). Most large companies have these plans, and it is an excellent way for the long term investor to buy mainly dividend paying individual stocks cheaply over a long time horizon.

Direct Stock Purchase Plans and Dividend Reinvestment Plans allow you to invest a small amount of money every month in an individual stock without most of your investment being eaten up through discount brokerage commissions. For example, I buy $25 worth of Wendy’s International’s stock every month directly from the hamburger chain. I pay only a $2.50 transaction fee every month to use the service provided by American Stock Transfer and Trust Company which runs the program for Wendy’s. So, each month $22.50 dollars of my investment actually goes to buying stock as opposed to $18 if I were to spend the same amount of money purchasing the stock through my brokerage account at Scottrade ($25 – $7 commission).

Some companies give you a discount from the stock price on Wall Street when you purchase shares directly from them. So, you could already be making a profit when you place your order. Other companies require you to buy one share from a stock broker and have the share listed in your actual name as opposed to listing it with the broker in “street name” (which is what normally happens in 99% of all stock trades). This can add costs to your initial up front expenses when you buy the shares, but over time your total costs will continue to decrease as you own more shares when you compare what you would have spent accumulating the stock through a normal discount broker with $7 commissions every month. Remember, we are using these DRIPs to own stock for the long term. You stock will cost you less the longer you hold it. DRIPs are perfect for the investor who is using dollar cost averaging to acquire shares.

A coworker is considering purchasing shares of John Deere (Stock Symbol: DE) using their Direct Stock Purchase Plan. So, I began researching just how easy it would be to open an account through them. So, I went to the company’s website and then their Investor Relations page. Then, I found their Dividend Reinvestment and Direct Stock Purchase Plan section. John Deere’s program is run by the Bank of New York. Most companies who offer DRIPs outsource their programs to banks and other investment companies to handle the slew of paperwork and administrative duties that go along with these programs. John Deere’s program is incredibly easy to set up online and does not require you to purchase your first share through a traditional broker. Investors can make optional monthly cash investments automatically through electronic debits from their bank accounts. From Bank of New York’s investor website, you can enroll in a new plan and fund it electronically online with a minimum investment of $500. You can also easily search all of the companies that the Bank of New York represents and monitor your account from the bank’s homepage.

It’s that simple. So, now that I have covered the top six characteristics you should look for when deciding on what individual stock to pick, you can check out some of these websites that handle DRIPs and Direct Purchase Plans for individual companies.

DRIP Websites:
American Stock Transfer & Trust
Bank of New York Mellon

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