Lowering Your Costs: How to Take Advantage of Direct Purchase Plans
In today’s lean and mean stock market environment, there is a real appeal to stocks that provide a stream of dividend income that can be purchased at a relatively low cost even if you are investing very modest sums of money.
Direct purchase plans allow you to do just that. The plans are a form of dividend reinvestment plan that allow you to go straight to the source—the company itself—for all share purchases, including your initial shares.
Best of all, direct purchase plans are easily accessible and manageable through on-line accounts with the plan administrators, a select group that currently consists of four major firms.
Currently, a little over 400 companies offer direct purchase plans, with minimum initial investments ranging from as low as $50 to as high as $1,000, although $200 to $250 is the most typical minimum range.
In addition, a growing number of foreign company stocks now have direct purchase plans available through their ADR (American depositary receipts) programs.
A Broker Bypass
Dividend reinvestment plans have been popular among shareholders interested in reinvesting dividends at a low cost; reinvesting dividends allows you to build up your position in a company and keeps your money working for you over time.
However, in a traditional dividend reinvestment plan you must first enroll to participate, which means buying the initial shares through a broker.
Direct purchase plans allow you to completely bypass brokers. In a few cases, direct purchase plans are offered even though no cash dividend is paid.
Of course, a number of major discount brokerage firms offer their own dividend reinvestment plans, which allow you to reinvest the dividends of the stocks you own through the brokerage firm with no fees attached. This is an advantage because the amount of many dividend payments would otherwise typically entail the purchase of odd-lot sizes, which often have higher transaction charges.
However, many corporate direct purchase plans allow participants to make additional cash purchases of shares at little or no cost—a feature no brokerage firm can match.
And, direct purchase plans typically have lower minimum investments than most brokers.
Table 1 provides a list of the companies that currently offer the lowest minimum initial investments to participate in their direct purchase plans.
|CHFC||Chemical Financial Corp.||50||Computershare|
|K||Kellogg Company||50||Wells Fargo|
|OPOF||Old Point Financial Corp.||50||Computershare|
|PNW||Pinnacle West Capital Corp.||50||BNY Mellon|
|PNM||PNM Resources Inc.||50||BNY Mellon|
|STC||Stewart Information Services||50||BNY Mellon|
|TRST||TrustCo Bank Corp. NY||50||Am Stock Transfer|
|PDZ||Domino’s Pizza Inc.||65||BNY Mellon|
|BMI||Badger Meter Inc.||100||Am Stock Transfer|
|BMR||BioMed Realty Trust||100||BNY Mellon|
|BOBE||Bob Evans Farms Inc.||100||Contact Company|
|CSE||CapitalSource Inc.||100||Am Stock Transfer|
|LSE||CapLease, Inc.||100||Am Stock Transfer|
|CHG||CH Energy Group||100||Computershare|
|CRBC||Citizens Republic Bancorp||100||Am Transfer|
|CVS||CVS Caremark Corp.||100||BNY Mellon|
|ETN||Eaton Corp.||100||BNY Mellon|
|GRT||Glimcher Realty Trust||100||Computershare|
|TEG||Integrys Energy Group, Inc.||100||Am Stock Transfer|
|KIM||Kimco Realty Corp.||100||BNY Mellon|
|LBYI||Libbey Inc.||100||BNY Mellon|
|MBFI||MB Financial||100||BNY Mellon|
|NNN||National Retail Properties||100||Am Stock Transfer|
|NYB||NY Community Bancorp||100||BNY Mellon|
|PNNW||Pennichuck Corp.||100||Am Stock Transfer|
|SJI||South Jersey Industries||100||Contact Company|
|SSS||Sovran Self Storage Inc.||100||Am Stock Transfer|
|TMP||Tompkins Financial||100||Am Stock Transfer|
|WHI||W Holding Co.||100||BNY Mellon|
|EK||Eastman Kodak Co.||150||Computershare|
|IIBK||Idaho Independent Bank||150||Computershare|
Where to Get Information
Companies with direct purchase plans appoint an outside agent to serve as the administrator for their plan. These administrators maintain plan records, send account statements to participants, furnish certificates for shares upon request—and handle the purchase and sale of shares.
Four major firms serve as administrators for U.S.-based direct purchase plans:
- American Stock Transfer & Trust,
- Bank of New York Mellon,
- Computershare, and
- Wells Fargo.
Table 2 lists the direct purchase plan Web sites of these four administrators, where you can go for information on the direct purchase plans they administer and to invest on-line.
American Stock Transfer & Trust Co.
Provides a list of all direct purchase and dividend reinvestment plans administered by the firm, including a summary of plan features.
By clicking on the name of each company you can get a brief description of either kind of plan. For direct purchase plans, you can buy on-line by clicking on “go.”
To get a prospectus for a direct purchase plan, click “go,” and then click on “plan materials.” For a dividend reinvestment plan prospectus, contact the shareholder relations department of the company you are interested in.
Bank of New York Mellon Shareowner Services
Go to Investor ServiceDirect, then click on Investment Plan Enrollment for a listing of firms with direct purchase plans whose stock you can buy on-line, as well as dividend reinvestment plans administered by the firm.
For a direct purchase plan prospectus, click on “Invest Now” and then click on “View Plan Material.” For a dividend reinvestment plan prospectus, contact the shareholder relations department of the company you are interested in.
Click on the Investor Centre. The Buy Stock Direct section provides a listing of all direct purchase plans and allows you to buy shares on-line. This section also provides a complete list of dividend reinvestment plans offered by the firm.
For a direct purchase or dividend reinvestment plan prospectus, click on “View” under “Plan Summary” and then select the link next to “Plan Brochure.”
Click on “Investment Plans” for a list of direct purchase and dividend reinvestment plan companies.
The Shareowner Online section allows you to invest on-line in the companies with direct purchase plans listed.
Click on a company name to access a prospectus link, to buy on-line or to print out an application form to mail.
Dividend Reinvestment Plans
Registrar and Transfer Co.
Go to Investor Services. Provides a searchable list of dividend reinvestment plans. By clicking on the company name, you can get a copy of the plan prospectus.
These sites also have listings and information on dividend reinvestment plans that they administer as well, along with educational articles on direct purchase and dividend reinvestment plans in general. Table 2 also includes the name of a plan administrator for a number of companies that offer dividend reinvestment plans; you can get prospectuses for these plans, as well as summary information, but you must be a shareholder to join the plans, and you cannot invest or manage your account on-line.
A few companies in Table 1 act as administrators for their own plans. To find plan information from a company directly, go to the company Web site and look in the Investor Relations area or call the phone number provided.
ADR Direct Purchase Plans
To help fuel interest in their ADR offerings, several banks have set up investor-friendly direct purchase plans.
An ADR is a negotiable certificate that trades like a common stock on a U.S. exchange; it is issued by a U.S. bank and represents shares of a non-U.S. publicly traded company. ADRs are priced in U.S. dollars, and owners avoid many costs associated with direct foreign investment.
ADR direct purchase plans operate just like the domestic-based ones, offering the same benefits, including on-line accounts and low minimums for initial investments, along with a low-cost way to reinvest dividends—although certain fees tend to be somewhat higher than their domestic counterparts. Purchases are in U.S. dollars, and dividends are paid and reinvested in U.S. dollars.
ADR direct purchase plans are administered through the bank sponsoring the ADR plan. Table 3 provides a list of these firms, along with their Web sites, where you can go to get more information and to invest on-line.
Click on Shareholder Services and then DB-Direct. The DB-Direct Investor Services Program is administered by Deutsche Bank Trust Company Americas. It allows new and existing shareholders to make ADR purchases, sell ADRs and reinvest dividends on-line. Currently there are 17 ADR companies that participate.
Sponsored by the Bank of New York Mellon. This on-line program allows existing shareholders of participating company plans to automatically reinvest dividends. In addition, first-time investors can purchase ADRs of participating companies. This program is part of NY Mellon’s on-line direct purchase plan program.
Global Invest Direct
Click on Shareholder Services. This program sponsored by JP Morgan allows new and existing shareholders to buy, sell and reinvest dividends of ADRs on-line. Currently over 80 ADR companies participate.
International Direct Investment Plan
Click on Investors, and go to Investment Plans/Services for access to the International Direct Investment Plan. Administered by Citibank, the program allows existing shareholders and first-time purchasers to buy shares, reinvest dividends, deposit certificates for safekeeping and sell shares on-line. Currently 13 ADR companies participate in the direct purchase program.
Direct Purchase Plan Options
After the initial purchase, the basic direct purchase plan typically offers reinvestment of dividends on all shares of stock registered in the participant’s name. This is often referred to as “full reinvestment.”
Under most plans, it isn’t necessary to reinvest all dividends. Instead, participants are allowed to reinvest dividends on a portion of their registered shares while receiving cash dividends on the remaining shares. Most plans also allow participants to purchase additional shares by making cash payments directly to the plan. Since the allowable amounts can be large, this option offers participants a low-cost way to build a sizeable holding in a company. However, it is important to note the frequency with which the plan invests cash payments, since interest is not paid on payments received in advance of actual investment.
Participant costs usually come in two forms: service charges and prorated brokerage commissions. Service charges cover administrative costs and are generally levied on each transaction; participants can hold costs down by combining a cash payment with a dividend reinvestment transaction, since usually the charges are capped (a $5 per transaction maximum is typical). Brokerage commissions levied on open market shares are at institutional rates (since the number of shares purchased is large), and are therefore considerably lower than the rate an investor would pay on his own.
Many companies cover all of the costs for share purchases from both reinvested dividends and optional cash payments. Some companies levy service charges, others prorate brokerage costs, and still others charge participants for both—there are many variations, so check the prospectus or plan description carefully.
A Note About Taxes
Direct purchase plans, as well as dividend reinvestment plans, have many advantages, but their tax status is not one of them—unless you are investing through an IRA (offered by a few of the companies). Whether you receive your dividends in cash or have them reinvested, a taxable event has occurred, although the tax treatment now is lower than it was previously.
In addition, if you reinvest dividends, the IRS considers the “dividend” to be equal to the fair market value of shares acquired with reinvested dividends. The fair market price is the price on the exchange or market where shares are traded, not any discounted price. Furthermore, any brokerage commissions paid by the company in open market purchases to acquire the shares are considered additional dividend income to the participant.
When shares are sold, the tax basis is the fair market value as of the date the shares were acquired, plus any brokerage commissions paid by the company, and it is treated as income to the participant. Participants receive 1099-DIV forms each year from the company detailing dividends to be treated as income as reported to the IRS.
If you are participating in an ADR direct purchase plan, there is little difference in how they are taxed in the U.S., since ADRs are traded in U.S. currency and dividends are paid in U.S. currency.
However, many foreign firms also will be required to withhold a portion of the dividend as a “foreign tax.” This tax paid can subsequently be recovered in the form of a tax credit by filing an IRS Form 1116 (Foreign Tax Credit).
Putting the Plans in Context
While direct purchase plans are custom-made for long-term, buy-and-hold investors, they are not on their own a reason to buy a stock. Many factors should be considered when evaluating any stock, whether it is a U.S.-based company or an international firm.
ADRs with direct purchase plans have all the additional risks of investing internationally. That includes currency risk—even though ADRs are traded in U.S. currency, they represent ownership in foreign-based stock, so performance will also be tied to the relative value of the U.S. dollar against the parent company’s foreign currency.
Diversification is another important consideration. Companies that offer direct purchase plans do not represent the full universe of domestic stocks or, for ADRs, the full universe of foreign stocks. Investing only in companies that offer these plans would cause your portfolio to be undiversified and overweighted in certain market segments.
So don’t put the cart before the horse and limit your purchases to stocks with these plans. Instead, stocks that have direct purchase plans should serve as a shareholder bonus for a company with promising long-term growth prospects.
For more on how direct purchase and dividend reinvestment plans work, see AAII's "Guide to Direct Purchase and Dividend Reinvestment Plans" in the AAII Guides area of AAII.com.