Direct Stock Purchase Plans: a Viable Alternative to Online Brokerages?

For investors seeking to accumulate shares of a particular company and holding on to those shares over a long period, a Direct Stock Purchase Plan (DSPP) may be a cost-efficient way to do so. However, investors should be aware that DSPPs may charge high fees to sell shares purchased through the plan. 

How Direct Stock Purchase Plans Work

A Direct Stock Purchase Plan (DSPP) is an investment service that allows investors to purchase stock directly from a company or, more commonly, through the company’s transfer agent. Major companies offering DSPPs include Exxon Mobil (XOM), American Express (AXP), and PepsiCo. (PEP), among many others. 

Investors can purchase stock as a one-time event or sign up for automatic periodic investments through the transfer agent managing the DSPP. A transfer agent is a third party which maintains the balances, records and transactions of the publicly-traded company’s shares. Transfer agents purchase or sell shares in bulk on behalf of the company, usually on a pre-set basis e.g. weekly, monthly or quarterly, to keep costs at a minimum. Major transfer agents include ComputerShare and Wells Fargo Shareowner Online. 

DSPPs generally operate on a periodic schedule where individuals can invest a fixed amount on a regular basis. This method allows for dollar-cost averaging investment over time, so that the investor acquires more shares of that particular company when the price is low and fewer shares when the share price is high.

Direct Stock Purchase Plan Fees & Minimums

Unlike online brokerages that charge a standard fee per trade, DSPP fee structures differ from company to company. Therefore, it is very important for investors to familiarize themselves with the plan prospectus prior to investing through a DSPP. Transfer agents also provide this information. DSPPs also have minimum initial deposit requirements. For example, for DSPPs offered at ComputerShare,  minimum initial investment requirements range from $50 to $1000, a manageable threshold for small-scale investors, and similar to minimum requirements of online brokerages.

To purchase stock through a DSPP, investors are usually charged different types of fees, explained below:

  • Initial Setup Fee: This fee is charged during account opening. Not all companies charge this fee; for example, a first time investor in Walmart Stores (WMT) DSPP will be charged an initial set-up fee of $20, whereas a first time investor in Procter & Gamble (PG) DSPP is not charged any set-up fees. The fee covers administrative expenses and is assessed prior to purchasing stock.
  • Ongoing Automatic Investment Fee: This fee is charged every time an automatic investment is made, and is usually lower than the fee per trade at online brokerages. Some DSPPs waive this fee. For example, McDonald’s Corporation (MCD) DSPP does not charge an automatic investment fee. 
  • Purchase Processing Fee (per share): This fee is charged every time an automatic investment is made, and is usually very small. The Coca Cola Co. (KO) DSPP charges $0.03 per share for every purchase. Some DSPPs do not charge this fee. 

DSPPs usually charge a fee to sell stocks, which may wipe out cost savings and value gains an investor has accumulated when shares are liquidated. To sell stock purchased through a DSPP, investors are usually charged different types of fees:

  • Batch Sale Fee: DSPPs execute trades in batches to lower costs. With batch sales, an investor may not be able to maximize gains from a stock since the investor cannot time the sale. This fee is charged when an investor sells stocks purchased through DSPPs. 
  • Market Order Sale Fee: Investors are charged this fee to sell stocks outside of the batch system. DSPPs often charge a higher fee for a market sale compared to a batch sale.
  • Batch Sale Processing Fee (per share): This fee is charged every time a batch sale is made, and is usually higher than the Purchase Processing Fee. For example, The Coca Cola Co. (KO) DSPP charges $0.15 per share for every batch sale. 
  • Market Order Sale Processing Fee (per share): This fee is charged every time a market order sale is made, and is usually the same as the Batch Sale Processing Fee. 

Direct Stock Purchase Plans vs. Online Brokerages

To illustrate whether a DSPP is a viable alternative to discount online brokerages, we compared the costs of purchasing a stock through a company’s DSPP and through an online broker to give investors an idea of the considerations. For this comparison, we used the following simplified assumptions:

  • the investor will purchase 10 shares through each investment platform; 
  • the investor is purchasing the shares as a one-time event;
  • the DSPP does not charge an initial set-up fee; and 
  • the brokerage used for comparison, OptionsHouse, offers the lowest fee per trade based on our study on the best brokerage online brokerages
Company X DSPP OptionsHouse
Initial funds $500.00 $500.00
Fee per trade None 4.95
Purchase Processing Fee (per share) 0.02 None
Cost to purchase 10 shares 0.20 4.95
Share price at T1 48.00 48.00
Value of 10 shares 480.00 480.00
Leftover funds 19.80 15.05
Value of account at T1 499.80 495.05

In this scenario, the investor receives a higher investment account value at $499.80 by purchasing stock through the DSPP, compared with an online brokerage at $495.05. If an investor is seeking to increase a position over time for a particular stock, a DSPP with low purchase processing fees may provide more value compared to an online brokerage.

How does this look after a sale, given the costs upon exiting? Extending the previous scenario, we compared the cost and net gains for an investor at a future point where the shares purchased on the DSPP are sold, either through a batch sale or a market sale. 

Comp X DSPP - Batch Sale Comp X DSPP - Market Sale OptionsHouse
Share price at T2 55.00 55.00 55.00
Value of 10 shares 550.00 550.00 550.00
Leftover funds 19.80 19.80 15.05
Value of account at T2 569.80 569.80 565.05
Sale Fee / Fee per trade 15.00 25.00 4.95
Sale Processing Fee (per share) 0.12 0.12 N/A
Value post-sale 553.60 543.60 560.10
Net gains 53.60 43.60 60.10
% return 10.72% 8.72% 12.02%

In this scenario, the account’s net value before the sale is higher for stocks purchased through the DSPP. However, after liquidation, the investor stands to gain more value if the stocks had been purchased through a brokerage, since sale costs through the DSPPs were much higher compared to a discount online brokerage. 

The example considered above may not apply to all DSPPs or online brokerages. However, it is a simple illustration that all transaction fees, whether at time of purchase or time of sale, will impact the net value of an investment. Investors should consider their goals and investing style before choosing an investment platform. DSPPs are a great way to accumulate share ownership of a particular company over a long period, but may not be the best way for investors looking to buy and sell actively.

To find out whether a company offers a DSPP, check the investor’s relations page on the company’s website. Most companies offer DSPPs through transfer agents such as:

  • ComputerShare
  • Wells Fargo Shareowner Online
  • American Stock Transfer & Trust Company

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