Direct Stock Purchase Plans [DSPPs] are just what they sound like – they let you buy stock in participating companies direct rather than going through a broker. Such programs also offer additional benefits such as automatic recurring investment and full investment of your funds, even if you cannot buy a full share initially.
These programs are offered via the transfer agents that represent the participating companies and are a great way to start to build a retirement nest egg for yourself or an education fund for your children. A DSPP can also be a great gift to a family member.
Specifically, I feel that DSPP participation by investors should be a part of a long-term investing strategy. The way the programs are set up, where it can be somewhat of a hassle to withdrawal your money, make them ideal candidates for buy and accumulate, especially with the full reinvestment of proceeds and dividends – even into fractional shares.
Some may argue that index funds are better places to stash cash for the long-term. There is certainly merit in that philosophy as the stock market as a whole is a fantastic wealth building vehicle. But, there is something to ownership and although lacking in the diversity of a DSPP, over the course of many years or even decades, you will find that some stocks outperform the market and some under perform. For a long-term perspective, both are well-received. Why? If you are investing a single stock or preferably 2-3 DSPPs to have some diversity, in the years the stock outperforms, you can get accelerated appreciation on your investment. In the event of under perform, such phases allow for accumulation of more shares at what may be a market discount. Of course, do not disregard the fundamentals of a company, but more often than not, companies participating in DSPPs are long-established, blue-chip type companies that pay out dividends to shareholders. This is not always the case, but you are more likely to find names of companies you recognize rather than under the radar companies.
I especially suggest DSPPs for your children, especially in a 529 account or a custodial account. Please consult your financial planner for the best situation for your needs, but I find it a great thing to start building for your children's future at an early age.
DSPPs have many elements to their make-up. Some of these include:
· Minimum initial purchase
· Purchase fees
· Online access
· Electronic automatic investments
· Reinvestment fees
In many cases, the companies charge initial set up fees or ongoing fees to help maintain the account. This makes sense considering the company incurs fees from the transfer agent to administer the plan, but many plans have no fees at all to enroll and purchase shares – some even offer discounts.
May I suggest the following three DSPP for a balance, affordable direct investment strategy for your children and part of your long-term financial goals?
Pfizer (NYSE: PFE)
Pfizer has not been the world's favorite stock in 2007. Pulling multiple drugs and citing rising costs, PFE has failed to keep pace with the rest of the pharmaceuticals. However, Pfizer is a great DSPP selection. The downside is a $500 initial requirement for participation, but after that, there are no requirements for recurring investment frequency. Of course, you have the option of monthly recurring investments – with a minimum of $50 – or making one-off purchases at your convenience with a minimum of $50. Fundamentally, I like Pfizer – and while analysts are saying it may be a couple of years, at least, before Pfizer returns to growth, this provides opportunity to build up some shares at these prices. Pfizer has raided their dividend every year for as long as anyone can remember and it seems that this trend will continue. The 4.5% yield offered by Pfizer at current market prices rivals the return that most savings or money accounts will give you – all without minimum balances or service fees. I think that over the course of the next 20-30 years, Pfizer is a winner. It certainly will not be the biggest winner, but having exposure to the pharmaceutical sector makes a great deal of sense. Additionally, taking the time to acquire some shares now, especially at these levels, should pay off over the years to come as we look for dividend increases which will significantly boost the yield on your initial shares. Plus, to keep things simple, as long as there is a need for medicine, Pfizer will remain an industry leader and a safe place to put some money aside for the future.
PFE 1-yr chart
Health Care REIT (NYSE: HCN)
The biggest knock on HCN is the $1,000 minimum requirement to establish an account – that can be a good chunk of change, especially for your two-year old. HCN sports all of the features you would expect from a solid DSPP, such as no purchase fees, full reinvestment of dividends, and option for a recurring investment. However, one thing that makes HCN stand out from many DSPPs is the 2% discount offered on initial purchase of shares, new purchases of shares, and on shares purchased through reinvestment of dividends. 2% is not a huge difference maker, but consider it like getting a match from your employer in your 401(k). Anytime you can buy stock for the long-run at even a slight discount, it is a win, especially with HCN's history of raising dividends. As a REIT, do not expect huge growth, but HCN is well positioned to take advantage of the well documented need for healthcare and things like assisted living facilities. As of December 31, 2006, HCN's portfolio consisted of over 550 properties, including assisted living facilities, skilled nursing facilities, independent living care retirement communities, and specialty care facilities. HCN continues to build its portfolio – adding over $400M in new acquisitions alone in the second quarter of 2007. This means more property and increased dividends over the long-term as more rents are collected. HCN has been around for nearly 40 years.
HCN 1-yr chart
IndyMac Bancorp (NYSE: IMB)
IndyMac is the 7th largest savings and loan and 2nd largest lender in the nation. The DSPP sports an affordable minimum investment requirement of $250 and company paid fees on all purchases and reinvestments. This bank has taken a hit with the recent mortgage and real estate slowdown and currently trades close to its 52-week low. The company's trailing dividend yield is 6.4% but historical dividend yield is closer to 2.7% - inline with other banks. Even with such a high yield, the payout ratio is still under 50%, so there is plenty of room for error in the event of an issue. Insiders and mutual funds are currently buying IMB and likely for the long-term. IMB trades at less than 7x current earnings and less than 8x projects earnings. The company is also trading at a slight (10%) premium to book value. The value indicators look good and over the short term, the problems hitting the real estate market may still take their toll on IMB, but with long term goals of generating 15%+ return on equity each year, I like my chances.
IMB 1-yr chart
Of course, there are many tremendous, established companies that offer DSPPs to investors - and most are good choices. However, if you were to ask me where I am putting some money aside for myself and my daughters, these three get the nod.