Avoid High-Cost Broker Commissions With This Investment Plan
Online brokers undoubtedly have made investing more affordable and accessible than ever before.
Gone are the days when you had to make phone calls to a dozen brick-and-mortar investment firms to compare all the different kinds of brokerage fees before deciding to plunk down the required $1,000 to $5,000 to start investing.
Today, opening an investment or retirement account online takes less than an hour and $100 for an initial investment. Most online brokers charge less than $10 per stock purchase.
But there's an even more affordable way to buy some of your favorite stocks. In fact, under this kind of investment plan, you can buy some great companies -- including strong-performers like McDonald's (NYSE: MCD) and Proctor & Gamble (NYSE: PG) -- without having to worry about paying a commission at all.
That's because under this investment method, you skip the broker and buy straight from the company itself.
I'm talking about direct stock purchase plans (DSPPs), which are a great way to affordably invest on a regular basis -- especially if you plan to buy and hold an excellent company over the long haul.
You may have heard of direct stock purchase plans before. Companies originally introduced direct stock purchase programs in the 1950s as a cost-efficient way for employees to buy stock in the company they were working for. The plans also allowed workers to reinvest any dividends they received (under a dividend reinvestment program, or DRIP) so they could purchase additional shares of their company's stock over time.
As the investment plans became more popular over the years, companies extended their direct stock purchase and DRIP programs to non-employees and outside investors like you and me.
Large companies -- typically dividend-paying, blue chip stocks -- like offering DSPPs and DRIPs to investors because it gives them access to a steady stream of capital. Today, hundreds of large companies offer DSPPs, and more than 1,000 companies offer a public DRIP program.
And that's good news if you're a long-term investor looking to buy great stocks and build your wealth slowly yet surely over time.
Once You Find Commission-Free Stocks, You May Never Go Back
Once you find a stock that you'd like to invest in long-term, find out if the company offers a direct stock purchase program. You'll want to enroll in it for these three main reasons:
1. Low or No Commission Fees: Because you're buying directly from the company and not through a broker, you may buy shares of the company's stock for an ultra-low commission/transaction fee (typically less than $5 per trade). There are even some companies that don't charge a transaction or commission fee at all under their direct stock purchase programs.
2. Flexibility: Many companies allow you to purchase shares, or even partial shares, in investment amounts as small as $10 to $50 at a time. You also can choose to automatically reinvest all or a portion of the cash dividends you receive to purchase additional shares of the company stock.
3. Discounted Share Price: Not all direct stock purchase plans have this benefit, but about 100 companies allow investors to purchase shares at a discount. Some companies make it possible to buy shares at a price 1% to 10% below the stock's current market price.
Enrolling in a DSPP is also a good way to keep your regular investing schedule on track. For example, if you enroll in Microsoft's DSPP, you can set up the plan to automatically withdraw a fixed amount ($25 minimum) from your bank account every month to buy Microsoft (Nasdaq: MSFT) shares. Simply set the date and the monthly amount you want withdrawn and over time you'll accumulate more and more shares -- no discipline required.
Go the extra mile and choose to have your dividends reinvested each quarter and before long you could amass a small fortune.
Consider this: If you invested just $1,000 through McDonald's DSPP in 1987, through dividend reinvestment and stock growth your investment would have grown to $18,000 today. And if you invested $1,000 through Microsoft's DSPP in 1987, you would have seen your shares appreciate to a whopping $170,000.
Want to get started on your own direct stock purchase plan? Microsoft, Proctor & Gamble and McDonalds all offer great direct stock purchase programs with small or even non-existent fees.
Here's how their direct stock purchase plans fare when compared to some of the best online brokerage firms:
As you can see, under the DSPPs above, you pay a small commission of just $2.50 per stock purchase (plus just 10 cents per share) for shares of Microsoft, $1.50 per purchase for McDonalds and no commission at all if you buy Proctor & Gamble.
That means if you were to make one monthly commission-free purchase of P&G instead of buying it through a broker that charges $10 for the same trade, then you could use those savings to invest an extra $120 per year. At a 6% rate of return, that $120 savings that you invested could grow to an extra $55,444 toward retirement in just 20 years.
Action to Take --> There are a few final things you should know before diving into direct stock purchase plans. Note that not every company offers a DSPP. They are usually offered by large, well-known companies -- think Wal-Mart (NYSE: WMT), McDonalds, Microsoft -- that pay regular dividends.
Also remember that dividend payments are still taxed as investment income under a DSPP and DRIP even if they're reinvested, so plan accordingly with your tax advisor.
To find out if your favorite company offers a DSPP (and for more company-specific DSPP details), you can visit the company's investor relations page. For example, you can find McDonald's DSPP information page here, Microsoft's DSPP information page here and P&G's DSPP information page here.
Keep investing regularly in your low-commission direct stock purchase plans and choose to reinvest those dividends -- your wealth is certain to grow slowly-yet-surely over time.
This article originally appeared on InvestingAnswers.com:
Never Pay Commissions On Stock Buys Again With This Investment Plan
StreetAuthority LLC does not hold positions in any securities mentioned in this article.