A direct stock purchase plan lets you skip the broker, but it can charge you for each purchase, each dividend reinvested, and each sale. It also buys only at set times. Use a $0-commission brokerage account instead, unless the plan charges nothing to buy and its discount on reinvested dividends will outweigh the sale fee.
A transfer agent such as Computershare, the firm that keeps a company’s shareholder records, runs the plan. Its fees take the biggest bite out of small, regular purchases, like $50 a month into a child’s account or a favorite dividend payer.
Hershey’s plan shows how the fees add up. The first purchase, $250 at minimum, carries no fee. After that, each automatic monthly purchase costs $2.50 plus 5 cents a share, so each $50 purchase loses more than 5% to fees. Reinvesting a dividend costs 5% of it, up to $5, plus 5 cents a share. Selling costs at least $15 plus 12 cents a share, more than 7.5% of a $200 holding.
A brokerage account with $0 commissions and fractional shares, which let $50 buy part of a share, puts the whole $50 into Hershey stock and lets you sell online with no commission. Plans also usually buy and sell at set times, at an average market price, rather than at a price or moment you pick, the SEC notes.
Before you enroll, find the plan’s fee schedule on the company’s investor relations site and check the setup fee and what each purchase, reinvested dividend, and sale costs. A few plans give reinvested dividends a discount on the shares they buy. Omega Healthcare Investors, for one, currently sets a 1% discount on the new shares its plan issues for reinvested dividends. A plan like that beats a $0-commission broker when buying and reinvesting cost nothing and the discount adds up to more than the fee to sell.
For any other stock, open a brokerage account and buy the shares there, then turn on dividend reinvestment for them.
Open the account at one of the best online brokers for free stock trading.
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