Yes, it’s true. You can buy stocks like Yahoo (YHOO), Wal-Mart (WMT), Home Depot (HD) and Intel (INTC) direct from the company without using a broker. It’s called a Direct Stock Purchase Plan (DSPP) and thousands of companies now offer them. This is different than a DRIP (Dividend Reinvestment Plan), though many companies offer both.

Over the years I’ve read many articles explaining the benefits of DSPP’s, but none of them mentioned the most important issue. The investors arch enemy: fees. Though buying stock direct from a company sounds like a great idea, if you’re not investing thousands of dollars per stock each month, the fees may kill your return.

There are however, many benefits to DSPP plans:

• Some plans, like Best Buy (BBY), let you buy your first share directly from them.
• You can build your ownership over time by Dollar Cost Averaging and automatically purchase shares every month.
• Reinvest your dividends automatically and take advantage of that compounding magic.

Insane Fee Plans

To illustrate how fees can hurt a DSPP, let’s use Borders Group (BGP) as an example. To join the plan, you need to have already bought at least one share from your broker or invest a minimum of $500 directly to the DSPP. To get around the $500 minimum, you can commit to sign up for an automatic investment plan of at least $50 a month. Let’s look at both DSPP options:

1. Buy $500 of stock: Fees for the Borders DSPP are an initial setup fee of $15, and a purchase processing fee of .03 per share. At the current price of $22, the total fees would be $15.68 ($15 setup + .68 in per share fees). That’s more then the $7 a discount broker like Scottrade charges.
2. Automatic investment plan of $50 for 10 months: You would pay the same setup fee and processing fee. Additionally, Borders will charge you $2.50 every time you buy stock, which in this case is every month. If the price stayed around $22 for the next 10 months you would pay 17.57 ($15 setup + .07 in per share fees + 2.50 per buy) for the first month, and $2.57 every month after. That means your $50 investment is only buying $47.43 worth of stock. Of course, you can invest $52.57 a month to make up for the fees, but that’s just more money out of your pocket. $2.57 on a $50 investment equals a 5% fee. That means your investment needs to grow 5% to break even!

Maybe you want to invest more than $50 a month in Borders. At $100 a month the fee is $2.82 or 2.82% (you’re paying .07 a share, $100 buys you 4.55 shares). This equates to more than double the average mutual fund, and your $100 is buying only $97.18 worth of stock. $150 a month costs you $2.98 or 1.98%, still more than a solid mutual fund. And a monthly investment of $200, will cost you $3.13 or 1.56%, which is still a high expense ratio.

No Fee Plans

Now, let’s take a look at a no fee plan like ExxonMobil (XOM). To join their DSPP, you need to have already bought at least one share from your broker, invest a minimum of $250 directly to the DSPP, or commit to an automatic monthly investment of $50 a month for at least 5 months. Let’s look at both of the DSPP options:

1. Buy $250 of XOM stock direct from the DSPP: There are no fees. At the current price of $81, you would buy 3.08 shares. You’re $250 buys $250 worth of stock.
2. Automatic investment plan of $50 for 5 months: Again, there are no fees. Your monthly contribution of $50 would buy .617 shares a month.

If XOM goes up 5%, then you made 5%. You don’t have to worry about making up for fees. Additionally, you can reinvest your dividends with no fees as well. Selling your shares will cost you .12 a share, which seems extremely fair since their are no purchase fees.

Low Fee Plans

If there’s a stock you like, but it doesn’t fall under the no-cost option, there is another alternative to the Insane Fee Plans; Low Fee Plans.

Sharebuilder.com is one example; they offer two low-cost investment plans:

1. $12 per month for 6 automatic investments per month ($2.00 per investment)
2. $20 per month for 20 automatic investments per month ($1.00 per investment)

Depending on the stock, the amount you invest and the number of trades per month, the Sharebuilder program could be a great alternative.

Building a Portfolio

No fee DSPP plans and Low Fee Plans like Sharebuilder allow you to build a portfolio by dollar cost averaging the sane way. By investing small amounts every month in a solid company like ExxonMobil and other high quality stocks, you will be on your way to building a solid portfolio.

To find companies with low or no-fee DSPP plans, check the following websites. They are the official transfer agents for the majority of companies offering DSPP plans. Make sure you read the company prospectus carefully to make sure there are no fees.

• Computershare
• Bank of New York
• Mellon Investor Services

If the plan charges you a fee, compare it to Sharebuilder, it might be the cheaper way to go.