Buying shares directly from a company eliminates broker’s commissions and saves you money. Publicly traded corporations allow direct investment in a few ways. You need to have your shares registered in your name with the company’s transfer agent. A transfer agent is a firm that handles securities transactions on behalf of the company. Transfer agent contact information is usually available on a company’s investor relations website.
Companies encourage shareholders to add to their investments by offering dividend reinvestment plans. To participate, you agree to have dividends used to buy additional shares instead of being paid directly to you. Companies often provide dividend reinvestment free of charge, so every penny of the money goes to buy shares. When a firm pays a regular dividend, reinvestment creates a compounding effect. That is, as dividends are reinvested, the number of shares you own increases, so you earn larger dividend payments that buy more shares.
Reinvestment and Taxes
Dividends are classified as ordinary income by the Internal Revenue Service. You must report dividend payments on your tax return and pay income taxes on them. As far as the IRS is concerned, reinvested dividends are still income – you still report them as income like any other dividend. Add the dollar amount of reinvested dividends to your cost basis for the stock. Cost basis is your total investment and is deducted from sale proceeds when you sell the shares to figure your gain or loss for tax purposes. If you don’t update your cost basis as you reinvest dividends, you could end up paying income taxes twice on the reinvested funds.
Direct Stock Purchase
Many publicly traded companies offer direct stock purchase plans through their transfer agents. To start a DSPP, you open an account with the transfer agent and deposit money. Typically, initial deposits requirements range from $250 to $500. If you arrange for $25 to $50 automatically deducted from your bank account each month, many companies waive the initial deposit requirement. There are no brokerage commissions. You may have to pay a small transaction fee to the transfer agent. Fees typically are $1 to $3 plus a few cents per share for each purchase. Some companies pay purchase fees for you.
You can invest in DSPPs from any company that offers one, but you must have a separate account for each. Typically, directs stock purchase plans include free dividend reinvestment and storage of stock certificates. Many allow you to set up the plan as an IRA account. In addition, because shares are registered in your name with the company, you receive copies of company annual reports, updates and other shareholder information.