Monday, November 11, 2013

How to buy dividend stocks with as little as $10

Many Americans use credit cards for a lot of their everyday purchases. In fact, many Americans have a problem with too much plastic. As a result, people in the US save a very small amount of their incomes. At the same time, a lot of individuals have a problem with debt.

On the other scale, you have beginning dividend investors, who cannot put more than a few hundred dollars per month in quality dividend stocks. Many investors are put off investing, because they believe they need a lot of money to start investing. With commissions at even the best brokers run anywhere between $5 - $10 per transaction, many investors rightly know that they need a lot of money coming each month before they can consider investing in dividend paying stocks. They are somewhat right, since a $5 commission on a $200 investment is equivalent to 2.50%, which is prohibitively high. A $10 commission on a $200 investment corresponds to an even worse 5%.

The options for this investor are to either purchase commission free ETF’s or mutual funds, use dividend reinvestment plans (DRIPs) or find a low or zero commission way to acquire stock. When I was first starting out, the best broker for me was Zecco, because it provided free trades every month. Now unfortunately there are almost no such options.

However, I recently stumbled upon Loyal3, which lets you purchase shares of some of the best stocks in the world for no cost. In fact, you can purchase shares in some of your favorite dividend stocks with as little as $10 with no costs whatsoever. Even better, you can use your credit card to purchase shares directly from the companies you are investing in with no cost and earn credit card rewards in the process. Selling you shares is commission free as well, and all costs so far have been bore by the companies themselves. The companies benefit by creating a truly loyal and long-term shareholder base, and get capital to invest in their businesses. If the stock you are buying costs more than $10/share, it is not a problem, since Loyal3 allows you to buy partial shares.

With Loyal3, you can essentially buy shares in your favorite stocks with as little as $10, which democratizes the investing process. This way, even the 99% have a chance of making money from the economic success of some of America’s greatest companies. One of the downsides behind this investing scheme is that there are only a limited number of 50 or so companies which have signed up to offer shares directly to stockholders.

Using the following list, you can see that there are several prominent dividend paying stocks there. A few notable examples include McDonald's (MCD), Coca-Cola (KO), PepsiCo (PEP), Unilever (UL), Target (TGT) and Wal-Mart (WMT).

One downside is that Loyal3 is a start-up, and therefore it is not an established broker. Therefore, this opportunity could be of a limited time whose purpose is to attract customers, before initiating a monthly fee or a small commission. Of course, once you own the stock, you can always transfer securities elsewhere, and close your Loyal3 account.

While I like that you can buy stock in companies with as little as $10 per investment with a credit card, you can only do this if you set up a monthly investment plan. If you are not good at managing your personal finances, it is possible to rack up quite an amount of credit card debt from those monthly recurring transactions if you say forget about it and do not track your credit card statements. Of course, if I had the choice of having a credit card debt from shopping for clothes or buying stocks, I would choose stocks any time. Therefore, you should be careful not to overextend yourself. However, since I monitor my accounts daily, I would never buy anything that will jeopardize my personal finances. Of course, if you use your checking account, you can make a one time investment at any time in a given month. You are only limited to buying up to $2,500 per stock in a given company per month ( for both credit and checking accounts).

The other thing to look for when you buy shares is execution speed and price. You do not want to “save” $5 on a commission, only to get horrible execution price from your broker. For example, if you had $200 and a share of IBM cost $190, you should end up with one share of IBM and $10 with a commission free broker. If your execution price is $195, it is quite possible that your broker is compensating for the lack of commission by making you pay inflated prices for stocks you are buying. With Loyal3, the shares are purchased at prices that approximate the market price within a few pennies/share, which is reasonable. In addition, the shares are put in your account soon after purchase.

Actually, the website says that “You will receive the actual share price (market price) of stock bought on your behalf on the day your purchase is executed". You will receive a link to your trade confirmation shortly after the shares are purchased in the open market. Based on 10 transactions I made with the site, I can attest that prices were very similar to market prices at time of purchase confirmation.

For example, I had set up my account to automatically purchase shares of Unilever (UL)on the 7th day of the month, using my credit card. The credit card was charged on October 7, and the stock was purchased at $37.68/share. The number of shares was posted to the account within a couple of business days.

Selling is really easy as well. It took approximately 3 businesses days when selling a stock, before you can get the money in your Loyal3 account. Per the company, you will receive the actual price (market price) of shares sold through the LOYAL3 platform on your behalf on the day your sale is executed.

Another thing to look for when evaluating brokers is to make sure that they are SIPC insured. This protects the investors for an amount up to $500,000, if the broker failed. Loyal3 is SIPC insured, so you should be ok if your investment there are worth less than $500 thousand.

The company does not automatically reinvests dividends for you into more shares. This does not speed up the compounding process for you. If you earn enough in dividends however, you can easily allocate the cash to your best idea available at Loyal3.

I would also want to see them have more information about investing in general. I think that most of the people using Loyal3 would likely be new to investments, and therefore an education section there would be helpful.

I have bought shares in the following companies in this account over the past month:

McDonald'’s Corporation (MCD) franchises and operates McDonald's restaurants in the United States, Europe, the Asia/Pacific, the Middle East, Africa, Canada, and Latin America. This dividend champion has consistently raised distributions for 38 years in a row. Over the past decade, it has managed to boost dividends by 28.40%/year. Currently, the stock is trading at 17.50 times earnings and yields 3.30%. Check my analysis of McDonald's for more details.

Target Corporation (TGT) operates general merchandise stores in the United States. This dividend champion has consistently raised distributions for 46 years in a row. Over the past decade, it has managed to boost dividends by 18.60%/year. Currently, the stock is trading at 15.60 times earnings and yields 2.70%. Check my analysis of Target  for more details.

Wal-Mart Stores, Inc. (WMT) operates retail stores in various formats worldwide. This dividend champion has consistently raised distributions for 39 years in a row. Over the past decade, the company has managed to boost dividends by 18.10%/year. Currently, the stock is trading at 15.10 times earnings and yields 2.40%. Check my analysis of Wal-Mart  for more details.

Dr Pepper Snapple Group, Inc. (DPS) operates as a brand owner, manufacturer, and distributor of non-alcoholic beverages in the United States, Canada, Mexico, and the Caribbean. This dividend stock initiated dividends in 2009 and has been raising them annually ever since. Currently, the stock is trading at 15.30 times earnings and yields 3.20%. Check my analysis of Dr Pepper for more details.

The Coca-Cola Company (KO), a beverage company, engages in the manufacture, marketing, and sale of nonalcoholic beverages worldwide. This dividend champion has consistently raised distributions for 51 years in a row. Over the past decade, the company as managed to boost dividends by 9.80%/year. Currently, the stock is trading at 19 times forward earnings and yields 2.80%. Check my analysis of Coca-Cola for more details.

Unilever PLC (UL) operates as a fast-moving consumer goods company in Asia, Africa, the Middle East, Turkey, Europe, and the Americas. This international dividend achiever has consistently raised distributions for 14 years in a row. Over the past decade, Unilever has managed to boost dividends by 9.90%/year. Currently, the stock is trading at 18.70 times earnings and yields 3.70%. Check my analysis of Unilever for more details.

Kellogg Company (K), together with its subsidiaries, manufactures and markets ready-to-eat cereal and convenience food products primarily in North America, Europe, Latin America, and the Asia Pacific. This dividend stock has managed to raise distributions for nine years in a row. Over the past decade, the company has managed to boost dividends by 5.60%/year. Currently, the stock is trading at 16.50 times forward earnings and yields 3%.

Overall, I am excited about Loyal3, and highly recommend it to anyone just starting out. If you already have a brokerage account, it might still make sense to acquire stock directly through Loyal3, assuming you find great companies available at attractive prices at that site, since there are no commissions.

This platform is very intuitive, easy to set up, and would satisfy the needs for most long-term dividend investors. If you need instant liquidity and instant gratification, plus streaming quotes and the ability to day-trade stocks, sell calls and puts on them, then this is not the platform for you. However, it is time in the market, not timing the market, that truly has determined the success of some of the most successful dividend investors of all time. Patience is a very lucrative virtue in the world of dividend investing for the long run.

Full Disclosure: Long IBM, MCD, TGT, WMT, K, DPS, KO, UL

Relevant Articles:

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Why Investors Should Look Beyond Typical Dividend Growth Screens

This article was featured on the Carnival of Wealth

18 comments:

  1. Which stock(s) on Loyal3 do you see as the best value at the moment?

    ReplyDelete
  2. This sounds very interesting. I'm going to take a look. I wonder how they make money, especially when absorbing the cc transaction fees?

    ReplyDelete
  3. Michael,

    I would use the screening criteria to get a list of stocks, and then analyze them if I haven't done it for the attractive ones.

    http://www.dividendgrowthinvestor.com/2011/03/my-entry-criteria-for-dividend-stocks.html

    Anonymous,

    Loyal3 has a nice FAQ area, that answers a lot of questions:

    https://loyal3.secure.force.com/support/articles/FAQ/How-does-LOYAL3-make-money/?q=how+does+loyal+3+make+money&l=en_US&fs=Search&pn=1

    LOYAL3 receives fees from companies that have a Social Stock Plan on our platform and will be compensated in its role in IPOs. For other stocks on our platform LOYAL3 does not receive fees.

    ReplyDelete
  4. H DGI,
    Thanks for the article, as always, you do a great job in helping out beginner investor like myself. I am exploring this Loyal3, however, so far the only thing holding me back is the dividend reinvestment. As a Dividend Income Investor, I want the broker to automatically reinvest the dividends. In your article you mentioned that you take it as cash and then allocate it to your preference. However, on their website, this is what they say about dividend reinvestment:
    "Dividend reinvestment, which is currently only available if described in a company's prospectus, is the process of using cash dividend payments to purchase additional shares of the same stock. The LOYAL3 platform handles this automatically. The additional shares will be purchased and added to your existing shares approximately three (3) business days after the dividend payable date.."

    Perhaps, I will contact them to figure out or check out the prospectuses of the individual stocks that I am interested in. What are the tax implications if you're taking the dividend as cash?

    Thanks!

    ReplyDelete
  5. Hi anon,

    I actually chatted with one of their agents/care reps, who informed me they only do automatic dividend reinvestment for one stock.

    What I meant in the article is that I would wait until the account accumulates say $10 in cash in Loyal3, and then simply purchase a stock. Also, be careful about dividend reinvestment in taxable accuonts, because if you have to sell, you would have to report each and every reinvestment into the stock as a separate transaction. If you dripped Mcdonald's for 20 years, that is over 80 individual transactional cost basis to think about.

    I think if you can afford a brokerage account, I would go for it over Loyal3. But if I had only a few hundred or less to invest, I could do Loyal3.

    ReplyDelete
  6. Anyways, I have had good luck with Sharebuiler. You can buy factual shares and a $4 commission if you buy with an "automatic" investment on Tuesdays. No, you may not get the best possible price, it is not out of line with the range for the day. Also, dividends are reinvested for free, again, fractional shares.

    Zach.

    ReplyDelete
  7. All brokers etc are now required to report to the IRS (and you) the cost basis for all sales of shares (mutual finds etc have to start reporting cost basis next year I think). So go ahead and purchase in whatever small and large amount amounts you want, the 1099 you get in the sell year will have the cost basis. They FIFO unless you request differently.

    I will continue monthly purchases of 25 stocks with Loyal3 using a credit card that gives me cash back, an instant discount/rebate on the shares. The dividends I'll just have to reinvest myself, until Loyal3 gets with the program and starts doing it themselves.

    ReplyDelete
  8. I like the idea of being able to invest with a credit card and getting cash back with no fees.

    I'm thinking of selling the stocks I currently hold at TradeKing that are also available through Loyal3 and repurchasing the stocks through Loyal3. This would allow me to earn a little extra cash back and allow me to reset the basis price for the stocks. Since I'm currently in the 0% tax bracket for capital gains, now would be a good time to do so.

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  9. Thanks DGI for the heads up on Loyal3. Looks good for beginners without much cash. Signed up today and bought some WMT. I already like their platform more than computershares.

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  10. Just took a look at Loyal3 and signed up. I noticed that you can only spend up to $50 as a max for the credit card. I tried to do their daily/monthly max of $2500 but you have to use your checking account for that amount. I even went down to $1000. No go.
    As far as dividend reinvestment, as long as it is free I don't care if they do it right away or if I have to do it myself when I get around to it.

    ReplyDelete
  11. I have a Self Directed Account with Bank of America Merrill Edge and if I maintain a specific balance in my B of A accounts I get 30 free trades a month on the Merriall Edge account and free checking and higher interest rates on my savings, checking, and brokerage cash account. The incentives improve as your balance gets higher at at a certain point even your brokerage account cash balance counts toward earning you benefits and more free trades. This allowed me to build a nicely diversified Dividend Growth portfolio with 35 stocks the smallest holding being Apple with 6 shares and the largest being Vodafone at 93 shares or from smallest by value to largest by value the range is $800 in VNR to $5000 with RDS.B.

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  12. The original appeal to me was the credit card option (get points). But like others have mentioned, the cap of $50 hardly makes it even worth the effort:

    "...Credit/ debit cards may only be used to purchase stock at the three (3) pre-set scheduled monthly investment levels--$10, $25, or $50. Credit and debit cards may not be used for one-time purchases, or for scheduled monthly investments other than the three (3) pre-set monthly investment amounts...."

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  13. Now I am a rookie when it comes to stocks and dividends. My question is if you purchase a stock through loyal3 and you receive a dividend, how do you receive it?

    ReplyDelete
  14. Actually, the cap is $2500 per transaction.

    Anonymous,

    You receive the dividend deposited to your Loyal3 account. You can easily withdraw it by linking your bank account to your brokerage account.

    Best Regards,

    DGI

    ReplyDelete
  15. I was able to use my debit card for a one time $500 purchase this week, so perhaps they changed their policy.

    ReplyDelete
  16. Just an update since DGI linked the story again today: Their policy currently states that they will reinvest the dividends for you if that applies to your stock

    ReplyDelete
    Replies
    1. Yes I saw that too. Does that mean when the stock pays a dividend it is reinvested? Suzanne

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  17. Any idea if there's a similar broker like Loyal3 in Canada?

    ReplyDelete

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