Direct Stock Purchase Plans (DSPPs) vs. Online Brokerages: Which Are Better?

In recent years, direct stock purchase plans (DSPPs) have lost much of their appeal -- likely due to the availability of online brokerages.

This has been even more pronounced given the preference of the investment public to invest primarily in funds, particularly exchange-traded funds (ETFs).

But DSPPs may still have a place for investors who prefer to invest in a portfolio of high-quality individual stocks.

If you plan to hold those stocks for many years, DSPPs are a solid choice, not only for holding your stocks, but also for taking advantage of automatic dividend reinvestment to increase your holdings.

What is a Direct Stock Purchase Plan (DSPP)?

A direct stock purchase plan allows you to purchase and hold shares directly with the company in which you're investing.

It eliminates the need for a brokerage.

The process is very similar to buying and holding company stock in your employer-sponsored retirement plan, like a 401(k).

Get a discount

It allows you to purchase stock directly in the company where it’s held, often at a small discount. That discount, if it’s available, will give you an instant gain on your purchase.

The discounts range between 1% and 10% of the stock’s value at the time of purchase. Companies will offer discounts as a way of incentivizing investors increasing their purchases of company stock.

Some companies may even allow you to set up an automatic purchase plan, either by debiting your checking account on a regular basis, or through payroll deductions.

Either method enables you to regularly increase purchases of company stock.

Share buybacks

In addition to purchasing new stock, some companies will also offer to buy back your shares.

When that happens, it may be done at specific intervals or at certain price levels. Some companies don’t charge fees on the sale of your stock (though others do).

Dividend reinvestment

Still other companies offer a dividend reinvestment plan (DRIP), that will provide for automatic reinvestment of cash dividends paid on their stock.

The best part:

This will enable you to steadily increase your investment in a company, without needing to contribute outside funds.

How to Find Companies that Offer DSPPs

Most companies that offer direct stock purchase plans tend to be large, well-established companies.

Many also pay dividends, making the process even more beneficial.

DSPPs are usually handled through a company’s investor relations department.

If you’re interested in investing in a small number of high-quality companies, you can check with these departments to see if they offer a DSPP, as well as a DRIP program.

That said:

Each company’s DSPP may be a little bit different from others.

For example, ExxonMobil’s DSPP requires minimum investments of $50 for the purchase of at least one full share. The program also offers a DRIP plan to reinvest your dividends. There are no fees to participate in the plan.

Other plans may have no minimum investment or may not require the purchase of whole shares.

Instead, they may enable you to purchase fractional shares in a flat dollar amount.

Transfer agents

But one common practice among companies that offer DSPPs is use transfer agents, which are companies that specialize in managing DSPPs.

For example, one popular transfer agent is Computershare, but there are several who perform the same function.

Computershare has been a preferred source for companies to offer their plans through, as well as where investors can hold shares without relying on a brokerage firm.

Computershare handles all the management details of each program for hundreds of different companies.

They’ll even enable you to purchase shares in various companies using direct ownership, but through the same platform.

You can check with websites like DirectInvesting.com, that provide lists of hundreds of companies offering direct stock purchase plans, choosing the ones that you feel will be the best fit in your portfolio.

DSPPs vs. Using a Brokerage Account

DSPPs have the advantage that they allow you to take direct ownership of the stocks in your portfolio.

Technically speaking, when you purchase stock through a brokerage firm, you have a proportional interest in the position of the specific company stock owned by the broker.

In effect, the DSPP cuts out the middleman – the broker – and gives you direct ownership of the company stock.

If the DSPP also offers a dividend reinvestment plan, you’ll be able to continuously reinvest your cash dividends to purchase more stock in the same company. That will enable you to increase your positions in select stocks over a long period of time.

And that will give you the benefit of dollar-cost averaging the purchase of those stocks over many years, eliminating a single purchase made at what may prove to be an undesirable price.

DSPPs work best for investors who prefer to choose and directly own the stocks they invest in.

Rather than choosing funds, which are really investments in markets more than companies, you can choose direct ownership in the companies you believe have the best future prospects.

The program works well for buy-and-hold investors, who plan to hold their specific stock investments for many years, maybe even decades.

DSPPs may also be preferred by investors who don’t fully trust investment brokerages.

Since you have direct ownership of the stock, you won’t have any concern about the financial integrity of a large brokerage firm.

Online Broker Advantages

None of the DSPP benefits mean online brokers are without their own advantages.

First, many brokers enable you to participate in DSPP plans offered by individual companies.

It can often be accomplished simply by pressing a few buttons on the platform, and enrolling in plans for each individual company.

But brokerage firms have another advantage that direct DSPP participation doesn’t, and that’s investment diversification.

The majority of companies don’t offer DSPPs.

If you invest through a brokerage firm, you’ll be able to invest in both companies offering DSPPs and those that don’t.

This may be important because some of the best performing stocks are growth stocks, or fairly new companies that are turning in winning performances, but not established long enough to offer DSPPs.

As well, brokerage firms obviously offer a greater opportunity to diversify beyond individual stocks.

You can hold funds, real estate investment trusts, options, and other investments, alongside your individual stock positions.

DSPPs vs. Online Brokers: Fee Comparison

The situation for DSPPs has become more complicated on the fee front in recent years.

As discussed earlier, many online brokers now offer an option to enroll in DSPPs through their own platforms.

But since most major brokerage firms have eliminated transaction fees in recent years, the no-cost advantage offered by DSPPs has largely disappeared.

Many, perhaps most brokerage firms, no longer charge transaction fees, even for fractional share purchases.

And while many DSPPs charge no fees, that’s not true across the board.

For example, Home Depot’s DSPP does charge fees. There’s a $5 fee for first-time investors, then a 5% fee for subsequent purchases, up to a maximum of $2.50 per purchase.

Meanwhile, should you decide to sell your Home Depot stock through the DSPP, there’s a sales charge of $25.

Unless a company DSPP offers a true no-fee plan, there’s virtually no price advantage compared to an online broker.

You should also be aware that many companies offering DSPPs impose specific stock prices for purchases.

Put another way:

You won’t be able to purchase stock at the given market price anytime you like.

They may require you to purchase the stock at a certain predetermined price level. That can work either for or against you, but it adds a complication to the DSPP program sponsored directly by individual companies.

Minimum Account Balances and Transaction Amounts

Many companies offering DSPPs do set minimum account balances and transaction amounts.

In the two examples presented above, both ExxonMobil and Home Depot have minimum DSPP purchase amounts of $50. Home Depot also requires a minimum initial investment of $500.

That kind of minimum investment might make it difficult for smaller investors either to participate in a DSPP plan with one company, or especially to diversify across several.

This is certainly not true of all companies offering DSPP programs.

But if you’re a small investor, you’ll need to focus on those companies that either require no minimum initial investment or ongoing purchase amounts, or who impose much lower ones.

Pros:

• DSPPs are a good choice for long-term investors, who prefer to focus on a small number of high-quality stocks, and hold them for many years.
• You can gradually increase your position in your favorite companies, enabling you to dollar cost average your investment over many years.
• Some DSPPs offer stock discounts, ranging from 1% to 10% of current market value.
• Some DSPPs also offer DRIP programs that enable you to reinvest dividends paid by the company back into the purchase of more stock.
• DSPPs may be preferred by investors who would rather hold direct ownership in individual companies, instead of through an intermediary, like a broker or a fund.

Cons:

• With the elimination of trading fees at most online brokers, it can be more cost effective to make systematic purchases of individual stocks through brokers, rather than individual companies that may charge fees for their DSPPs.
• DSPPs make it more difficult to diversify your holdings. They’re concentrated primarily in a small group of individual stocks. Since most companies, including some of the best performers, don’t offer these plans, you may exclude yourself from those investments.
• DSPPs may force you to hold your stock positions with a variety of different transfer agents, rather than on a single brokerage platform that includes all your investments.

Conclusion

Whether or not DSPPs will work to your advantage will depend on your own investment preference.

They may be a good choice for anyone who prefers to invest in individual stocks, rather than in funds for through an intermediary, like a brokerage firm.

They also represent an advantage if you prefer to invest in a small number of stocks with a long history of high performance.

But if you’re a more active trader, or you prefer to diversify your holdings across many different asset classes, including mutual funds and ETFs, DSPPs may not be the right choice for you.

Investing through an online broker will give you far more investment options, and enable you to hold them all on one platform.

With the recent elimination of trading fees by most brokers, you may also have an improved investment performance over the long term.