Buy shares directly from the company

Closeup of stock certificate

Looking for an easy and cheap way to invest money in solid dividend-paying stocks?

Then bypass brokers and buy stocks directly from the company itself.

There are hundreds of companies that allow this, including such household names as Caterpillar, General Mills, Intel, McDonald's, Motorola, Pfizer and Verizon.

Direct stock purchase plans, also known as dividend reinvestment plans, are great for anyone who wants to invest small amounts of money in individual stocks at a regular monthly interval.

These plans are cheap to use and let you invest as little as $25 per month, says Chuck Carlson, editor of DRIP Investor Newsletter. You can make direct one-time stock purchases, but the minimum purchase is frequently much more expensive.

"There are many companies that have no fees at all, and the commissions you're saving on can add up to an enormous percentage over time," says Vita Nelson, editor of the annual The Moneypaper's Guide to Direct Investment Plans.

We're talking a savings of thousands of dollars over the life of an investment.

Consider that a standard commission at E*TRADE is $9.99. If you were to invest once a month in a company like Exxon Mobil, you'd pay $120 per year in commission fees.

Buy directly from Exxon Mobil, on the other hand, and you'll pay no fees to set up your account or to buy stock.

How much direct stock purchase plans cost

Company Minimum investment Purchase fees Sales fees
Caterpillar Inc. 10 monthly investments of $25 $15 enrollment; $1 per transaction plus $0.03 per share purchased after you own 200 shares $15 batch sales fee plus $0.12 per share sold
Exxon Mobil Corp. 5 monthly investments of $50 None $15 batch sales fee plus $0.12 per share sold
McDonald's Corp. $50 per month (no minimum number of investments required) $5 enrollment; $1.50 per transaction $15 batch sales fee plus $0.15 per share sold
The Coca-Cola Co. 10 monthly investments of $50 $10 enrollment; $2 per transaction plus $0.03 per share $15 batch sales fee plus $0.12 per share sold
The Procter & Gamble Co. $250 initial investment; $50 per transaction thereafter No enrollment fee; $0.02 per share $15 batch sales fee plus $0.12 per share sold
Verizon Communications Inc. 5 monthly investments of $50 No enrollment fee; $0.03 per share $15 batch sales fee plus $0.12 per share sold
Source: Computershare

Nelson says such plans are especially advantageous to small-money investors.

That's because if you buy $1,000 of stock per purchase, a $10 commission will cost you 1%. But if you buy $100 of stock at a time, that fee will set you back a whopping 10%.

Start by looking at companies in the Dow Jones Industrial Average, preferably those with direct investment plans that have no fees.

Companies listed in the Dow — like Coca-Cola, Exxon Mobil and Procter & Gamble — have their ups and downs, but they are solid long-term performers and unlikely to lose value rapidly.

Many of these companies also pay dividends of 2% or more. The biggest benefits come when you reinvest these dividends to buy more shares.

Another benefit is that a direct investment plan essentially forces you to use dollar cost averaging.

It's a strategy that prevents you from trying to time the market. You simply invest a set amount of money at a regular interval, say monthly, no matter what's happening with the market.

When the market is up, your money will buy fewer shares; when it's down, your money will buy more.

6 smart moves to start investing in stocks6 smart moves to start investing in stocks: You've got your financial house in order. You've got an emergency fund. You have little or no debt and a 401(k) set up at work. Now you’ve got a few extra bucks to put away, and you want to make a little more than the measly interest rates CDs are paying these days. Follow our advice, and you'll build a solid portfolio of individual stocks that can grow your money over time with the least possible risk.

It's important to remember that diversification is a critical element of spreading your risk while investing. The best way to achieve diversification is through a balanced or target-date fund.

Carlson says you can begin building a diversified portfolio through direct stock purchase plans by buying different companies in different industries. But these stocks should not make up your entire portfolio.

Direct stock purchase plans aren't for investors who want to buy and sell based on the latest news. They may require shares to be traded on a regular, preset schedule at an average market price. That means you won't be able to make a trade as quickly as you can with a broker.

You can find when the company will buy and sell shares and how it determines the price by reading its disclosure documents.

Many direct stock purchase plans are now administered by third parties, the biggest one being Computershare.

Read the full plan description and information at the company's website to determine when they buy and sell shares and how they determine the price.

Pay attention to eligibility requirements, fees charged with each transaction and number of shares needed to open an account.

You'll also want to look at the dates you can invest, how to withdraw, transfer or sell shares, and how to withdraw from the plan entirely.

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