Are direct stock purchase plans good for beginners?

ByABC News
February 16, 2012, 8:11 PM

— -- Q: Are dividend reinvestment programs a good way for investors to get started?

A: Investors looking for low-cost ways to dabble with stocks often consider direct stock purchase programs.

Direct stock purchase programs (DSPPs) are a way for investors, who may not have a brokerage account or don't want one, to buy shares of stock directly from a company. Investors who are diehard fans of one company's stock, and have an aversion to brokerage accounts, often praise DSPPs.

DSPPs can also be attractive with low minimums. Disney, for instance, will waive its minimum $250 initial deposit for investors who commit to buying $50 of the company's stock every month.

But despite the merits of DSPPs, they're not an ideal solution for most beginning investors.

Setting up an account and buying low-cost ETFs will be a better option for most investors due to:

•Diversification. When you're part of a DSPP, you're racking up shares of a single stock. If that company runs into a problem, and most companies do at some point, then you'll expose your portfolio to greater risk. Buying an ETF that owns shares of many companies is a much better option for most beginning investors.

•Fees. DSPPs have very low fees in some cases, including with Disney. But they're not $0. Some brokerages, including TD Ameritrade, Charles Schwab, Scottrade and Fidelity, allow customers to buy and sell ETFs for no fee.

•Convenience. Having a brokerage account can provide other benefits. For one thing, managing DSPP accounts with several companies could get cumbersome. Keeping all the stocks in the same brokerage account helps investors keep track of everything. Some brokerage firms might offer perks such as check writing and access to market information and cost-basis tracking tools.

DSPPs might be fine for investors who want to build large positions over time in certain individual stocks. But for the majority of investors looking to diversify their holdings at a low cost, there are better ways.

Matt Krantz is a financial markets reporter at USA TODAY and author of Investing Online for Dummies and Fundamental Analysis for Dummies. He answers a different reader question every weekday in his Ask Matt column at money.usatoday.com. To submit a question, e-mail Matt at mkrantz@usatoday.com. Follow Matt on Twitter at: twitter.com/mattkrantz