Direct Investment Plan Basics
Did you know that you could buy stock directly from public companies without going through a broker? In this section, you will learn about the two ways public companies allow you to buy their stock directly from them: through direct purchase plans and dividend reinvestment plans (DRIPs). You will learn how these plans work, the major difference between the two, and how to use these investment plans effectively so you can get the most for your investment dollar.
Why Companies Offer Direct Purchase Plans and DRIPS
You may wonder why companies would want to encourage small-time investors to buy their stock by offering direct purchase plans and DRIPs. The answer is quite simple: companies that offer some form of stock purchase plans see them as a way to encourage an investor to become a loyal customer.
For example, if you own shares in McDonald’s, chances are that you would rather buy McDonald’s food than Burger King’s (assuming you occasionally eat fast food). In addition, direct purchase plans give companies a cheap way to raise money directly from investors rather than going through investment bankers who would underwrite stock offerings. More than 1,600 companies now have some form of a stock purchase program.
The Difference Between Direct Purchase Plans and DRIPS
Direct Purchase Plans
Companies that allow you to economically purchase your first share, and all other shares, of their stock directly from them without going through a broker are said to have direct purchase plans. These shares are also called no-load-stock or no-load-shares, because you can purchase them without a broker’s fee or load (although you may be charged a small administrative fee).
More than 400 companies currently offer direct purchase plans, and the number is growing each year.
At least 22 companies in the Dow currently offer direct purchase plans. Some of these companies, which you might recognize, are: Walt Disney Co., Exxon Mobil Corp., Nike Inc., and McDonald’s Corp.
Dividend Reinvestment Plans (DRIPs)
Companies that allow you to buy additional shares of their stock directly if you already own one or more shares of the company’s stock are said to have dividend reinvestment plans (DRIPs).
You will find that some investors use the terms “direct purchase plans” and “DRIPs” interchangeably, but there really is a difference between the two. This difference can be significant to Teenvestors, who have little money to invest in the first place. Historically, the most significant difference between direct purchase plans and DRIPs is that a company that offers only a DRIP will generally not allow you to purchase your first share from it directly (unless you spend a ridiculous amount of money for the initial purchase).
Unless you already own a share of that company and it is registered in your name, you would have to purchase your first share of the company’s stock through a broker. Of course, once you have that initial share, you’re set. You can then participate in the DRIP and take advantage of the reduced fees offered through it. Companies such as Boeing and Travelers offer only DRIPs. The “dividend reinvestment” part of these plans refers to the fact that when you participate in them, your dividends are automatically reinvested in additional shares of the company’s stock.
The Stock Registration Requirement
Both direct purchase plans and DRIPs require that all shares you buy as a participant in the plans be registered in your name. Usually, when a stockbroker buys shares for you, the stocks are registered in the name of the firm for which the broker works (or in the street name, as it is called). For example, if you buy one share of Nike’s stock through a broker, the share belongs to you but Nike does not have any idea that you actually own it.
All Nike knows is that your broker has one share that belongs to someone. To participate in DRIPs, however, the company whose stock you own must be aware that you personally own one of their shares. To accomplish this, your broker must buy your initial share, register the security in your name, and have the stock certificate mailed to you. All brokers (new online brokers as well as traditional brokers) can do this effortlessly. The certificate is the proof that companies with stock investment plans need to allow you to participate.
Some brokerage firms charge ridiculously high fees for transferring the security in your name. Others charge more affordable fees for this transfer. After the transfer, the company whose stock you own will recognize you as a shareholder, and it will send annual reports and other investment material directly to you. More important, you will then qualify for the company’s DRIP if it has one.
The Blurring of Direct Purchase Plans and DRIPS
Over the years, the practical differences between direct purchase plans and DRIPs have narrowed because companies that offer DRIPs have administrators who can facilitate the process of your purchase of your first share. Ultimately, no matter whether you invest through a direct purchase plan or a DRIP, all that should matter to you is how much money you have to put upfront and how much additional money, if any, you are required to contribute to the plan. Overall, Teenvestors will generally find direct purchase plans more affordable than DRIPs. Companies that have direct purchase plans usually have smaller initial or enrollment fees, which will then allow investors to continue to buy additional shares.