The Best "No Fee" Direct-Purchase Plans

08/27/2020 5:00 am EST


Charles Carlson

Editor, DRIP Investor

It is no secret that fees in dividend reinvestment plans/direct-purchase plans have trended higher over the last decade, asserts dividend reinvestment plan expert Chuck Carlson, editor of DRIP Investor.

And, unfortunately, that trend has occurred during a time when trading fees at online brokerage firms have trended lower and have reached zero at a number of firms. Probably due to this push to zero trading fees, I have received a number of requests to review DRIPs that have no fees on the buy side.

To be sure, plenty of traditional DRIPs — plans that require investors to already be a shareholder in order to enroll in the plans — have no fees on the buy side. But admittedly, traditional DRIPs present some problems in terms of getting that first share you need to enroll in the plan.

Thus, I’ve focused my search on direct-purchase plans — those companies that allow investors to buy the first share and every share directly from the company. Here I am reviewing what I believe are some of the best companies offering “no-fee” direct-purchase plans.

Be aware that while these companies do not charge any fees to buy stock in the plan, some have a onetime enrollment fee of $10 to $20 to join the plan. Also, investors should expect to pay fees when selling from these and other DRIP plans. Among the stocks listed here, the following four offer especially interesting appeal.

First American Financial (FAF) provides specialty insurance services. Core business lines include title insurance and closing and settlement services; home warranty products; and banking, trust, and wealth management services. Its connection with the real estate market means low interest rates and a vibrant mortgage and refinancing market should be good news for the company.

The firm has beaten consensus earnings estimates in the last four quarters, and earnings estimates have been trending higher over the last 30 days. In the second quarter, total revenue was up 7% to $1.6 billion.

First American stock has underperformed the broad market over the last 12 months, but the company’s improved operating momentum should help these shares rebound.

The dividend yield of 3.2% is an added kicker to total return. With a market capitalization of around $6 billion, First Financial offers a solid pick for investors wanting to fill the mid-cap space in their portfolio.

General Mills (GIS) has been a beneficiary of the “stay-at-home” trend. With restaurants closed or with restricted access and consumer mobility hampered, more meals are being cooked at home.

That plays to the strength of General Mills and its bevy of popular brands, including Betty Crocker, Pillsbury, Yoplait, Gold Medal, Fiber One, Wheaties, Haagen-Dazs, Old El Paso, Progresso, and Green Giant. The firm also has products in the pet segment under the Blue Buffalo brand.

Sales were up 21% in the latest quarter, with organic sales up a whopping 16%. The stock has responded to the strong uptick in business, with these shares recently posting a 52-week high. The question for General Mills and other stay-at-home plays is whether demand will continue at high levels once travel restrictions loosen.

The stock trades at 18 times fiscal 2021 consensus earnings estimate of $3.53. That is not a cheap valuation, but nor is it excessive. The dividend yield of 3% adds to the appeal of these quality shares.

Paychex (PAYX) provides payroll-processing and other human resources services primarily to small and midsized businesses. Obviously, strong employment numbers work to the company’s advantage.

Also, the level of interest rates matters since the company derives income from the interest earned on funds it is holding for clients to pay payroll taxes, etc. Thus, the firm faces challenges during periods of high unemployment, stunted new-business creation, and low interest rates.

Not surprisingly, the stock is down roughly 20% from its 52-week high of just over $90 per share. Still, the stock is a nice way to play the “reopening” theme, although that theme has been tested a bit in the near term due to fresh rounds of restrictions in many parts of the country. The stock’s dividend yield of 3.4% should provide some downside support to the stock.

The stock is vulnerable should we have a second national lockdown. But short of that happening, I think downside risk should be limited to the mid-$60s. A decline to that level would be an excellent buying opportunity in the stock.

S&P Global (SPGI) has been an outstanding stock, rising 44% over the last 12 months and 29% year to date, far exceeding the return of the S&P 500 Index over both time periods. The company’s lucrative index licensing business provides a way for investors to play the continued growth in index investing.

Also, the surge in debt offerings has been a boost to the company’s credit rating business. Given the company’s sensitivity to the financial markets, the stock is vulnerable to significant market weakness.

That sensitivity was in full view earlier this year when the stock fell below $200 in late March. However, I have been a long-time fan of these shares and view significant declines as big opportunities in the stock.

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