Building a portfolio of dividend stocks is one of the best ways to build personal wealth, not to mention a steady income stream. One of the biggest concerns to dividend investors, besides which stocks to pick, is the fees and commissions involved in building a stock portfolio. While online discount brokers have made it cheaper to invest, those $10 commissions for a trade can really add up – especially for the small investor.
A $10 commission on a $500 investment means an investor is paying 2% of their purchase in expenses. The whole point of dividend investing is to generate income and a 2% charge wipes out most of your dividend payment. There are a few ways that investors can help to save money investing in dividend stocks, which I have listed below.
1 – Direct Stock Purchase Plans (DSPP)
Investing through a direct stock purchase plan (DSPP) has plenty of advantages, most notably – no brokerage commissions or fees. Instead of buying and selling stock using a broker, these direct purchase plans allow investors to buy stock directly from the company in which they plan to invest in. There are a few one-time fees often associated with setting up these accounts, but they are minimal compared to commissions charged by a stock broker.
Direct stock purchase plans are ideal for long term dividend investors looking to build a solid portfolio. They help to keep expenses low and allow investors the opportunity to reinvest any dividend payments received. Most plans also offer the chance to setup automated investments which will transfer money from a checking or savings account once per month and purchase stock. This is a great way to dollar cost average into a position over time as opposed to purchasing all shares once.
Each DSPP is different, with many being run by third party transfer agents. It is a good idea to investigate the specific details of each company’s direct stock purchase plan before investing. Direct stock purchase plans may not be for everyone, but they do offer the investor an alternative way to invest at a fraction of the cost of traditional brokerages.
2 – Dividend Reinvestment Plans (DRIP)
Another way to save money on dividend stocks is to setup a DRIP on each position. A dividend reinvestment plan, or DRIP can be setup to automatically purchase additional shares of stock from any dividends received with no commissions or fees. As mentioned earlier, investors who open up a direct stock purchase plan can opt to reinvest any dividend payments back into purchasing additional shares of stock. Since there are no commissions charged on these purchases, the investor is able to limit the amount of expenses needed to build a position in the stock.
Most discount brokers also offer the dividend reinvestment plan option to their clients. For example, I have selected to reinvest 100% of the dividend payments I receive for all stocks in my portfolio in my Fidelity brokerage account. Since there are no commissions charged on these purchases, I am able to earn compounded interest on my investments at no cost. This allows me to not only save money on purchasing more shares of stock, but it helps to automate more of my investing which saves me time.
Direct reinvestment plans (and DSPP’s) also allow investors the opportunity to purchase partial shares. Say you have $50 leftover, but the stock is trading at $100. A DRIP will automatically purchase .5 shares so that you don’t have to wait until you have enough funds to cover a full share.
3 – Dollar Cost Averaging
While it may sound more expensive, dollar cost averaging (DCA) can actually save you money on investing in dividend stocks. Dollar cost averaging requires the investor to make multiple purchases of a stock as opposed to making a single purchase which cost more in broker commissions. However, if the purchases are well planned out, dollar cost averaging will make sure the investor pays a fair price for a stock. I can’t tell you how many times I have invested in a stock that has dropped almost immediately. Since incorporating DCA into my investing, I have been able to stabilize my price per share for each of my stocks, despite the added commissions.
One way to dollar cost average without paying any commissions is through direct stock purchase plans, as mentioned earlier. By setting up an automated investment options (which most plans offer), investors are able to purchase stocks each month in smaller chunks. For example, instead of investing $600 in a company at one time, investors can contribute $50 each month for a year and get the same results. Purchasing a stock 12 times per year will make sure you are paying a fair price for a stock.
Investing in the top dividend paying stocks can provide a steady source of income for many years. As an investor builds his/her portfolio, it is important to limit expenses as much as possible in order to accelerate ones income. The three tips listed above are just a few of the tools available to all investors to help them limit the total commissions and fees paid to build a dividend portfolio.
What other cost saving steps can you recommend when buying dividend stocks?
Photo credit: totalAldo.