Direct Stock Purchase Plans (DSPPs)
Stocks are one of the better asset classes to build generational wealth. One share of stock represents ownership rights to a business and valuations are aligned with corporate profitability, which may stretch towards infinity. Direct Stock Purchase Plans (DSPPs) do offer a relatively easy pathway for smaller investors to participate.
Dollar Cost Averaging
Most large corporations offer direct investment plans through a third-party administrator, like Computershare. These direct investment plans will either be free, or charge small fees at a few dollars per transaction, or $50 per year. DSPPs typically encourage small investors to dollar-cost-average, by waiving fees if participants agree to invest at least $50 per month through ACH bank draft.
Dollar-cost averaging is critical to mitigate behavioral risks. Smaller investors are notorious for plowing cash into stocks at the top of the market, only to panic and dump shares through the bottom of a sell-off. Here, a full amount will be regularly invested, and direct plans do purchase fractional shares.
Dividend Reinvestment (DRIPs)
Direct stock purchase plans are synonymous with dividend reinvestment plans (DRIPs). DRIP investors may arrange to reinvest all dividends back into the corporation to buy additional shares of stock, which may ultimately grow into a substantial position through long-term compounding. A monthly $300 investment will grow to $1,000,000 after 30 years compounded annually at 11%. At retirement, a diligent saver may opt to deposit dividends directly into his bank account.
A direct stock purchase plan may supplement a diversified investment portfolio. DRIPs are ideal for beginners, who may excitedly clamor to buy and hold shares of stock in their favorite businesses. Ronald Read, a Vermont janitor, amassed an $8.1 million fortune, largely through his collection of direct stock plans.
DRIP plans only purchase stock at average weekly prices, which is prohibitive for frequent traders. Pure competition has driven all brokers to now offer free trades, which has made this direct investment business model somewhat obsolete. Computershare, for its part, is discontinuing its IRA program.