Showing posts with label best brokerage accounts. Show all posts
Showing posts with label best brokerage accounts. Show all posts

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

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This article was featured on the Carnival of Wealth

Friday, May 24, 2013

Best Brokerage Accounts for Dividend Investors

When I first started dividend investing, I was looking for the lowest commission possible. I ignored any other features of a stock brokerage, since I viewed the brokerage industry as one that provides a commoditized service. Back in 2008 – 2010 I was a big fan of Zecco, mostly for their free trades. Since then I have branched out to other brokers. Before I was a dividend investor, my investing was concentrated on buying mutual funds in a 401 (k).


The chart above summarizes brokers I have personally invested through since I started my site to document my dividend investing journey.  In addition, the information above is not intended to be complete in any means. I have rated the brokers above based on my experience with them, with Schwab being the best, while Sogotrade having room for improvement. Sogotrade charges $5 for trades, but $3/trade if you prepay. The chart shows the commissions for each broker for stock trades, and assumes an individual investor does less than 10 trades/month. It also lists the minimum amounts an investor needs to deposit, in order to open a cash account. The next column shows whether the broker offers dividend reinvestment of partial shares. Tradeking does allow dividend reinvestment per my experience, but not for partial shares. The next to last column shows the length of time that trade history and trade statements are available to the customer. In some cases, the trade history is limited to my own experience with the broker. In other cases, this is based on information available on the broker website. The last column shows that none of the brokers had any inactivity fees at the time I wrote this article.

The story below discusses my experiences with brokers, which could be different than your experience.

I believe that brokers should offer a commission that provides value to customers and also a decent rate of return to the brokerage company itself. A low commission is typically associated with rudimentary platforms which could be very confusing to the investor. Of course, if you are an experienced investor who knows what they need and doesn’t need much hand holding, then you should do fine with simply the lowest cost broker. However, when something goes wrong, and it usually will, you will start regretting your decision.

My experience with Zecco was positive for a few years, while they were offering 10 free trades for accounts whose balance exceeded $2,500. Initially, back in 2006, Zecco offered 40 commission free trades to all customers. In 2009 Zecco changed its rules once again and only provided ten free trades to customers with account balances that exceed $25,000. In 2010, Zecco eliminated commission free trades for everyone except traders who made 25 trades/month. In the meantime, I had a few other brokerage accounts, but was considering Zecco to be my primary individual brokerage account. Then Zecco started going through platform upgrades and changed their clearing firm. In addition, Zecco never offered automatic dividend reinvestment that allowed your investments to compound. This was never an issue for me, since I like to accumulate my dividends and new funds, before I buy a security. The only problems that I had were with companies that were paying 5% stock dividends or companies like Kinder Morgan LLC (KMR) which paid distributions in fractional shares. Zecco used to provide these distributions in cash, thus creating a taxable event and negating any long-term compounding of my investments.

In the meantime, a lot of Zecco investors were unhappy with their platform, because it often crashed during periods of extreme market volatility. Back in late 2008, there were several times when I was unable to log into my Zecco account to place a trade. I was also unable to log into my Zecco account during the May 6, 2010 flash crash. I was able to log into my Schwab account however on both occasions. When Zecco upgraded platforms and changed clearing firms, this created some issues for me. Actually, this created a lot of headaches for me, because some of the shares I owned like Royal Dutch Shell (RDS/B), Brown-Forman (BF/B) and Nestle (NSRGY) were either not showing in my account, or had an incorrect symbol and the position amount was zero. It is a scary feeling to wake up and see that your equity holdings are not correct or simply not there.

A few months ago, Zecco merged with Tradeking. I was afraid that I would still have issues, but luckily this never materialized. The main issue with the merger was that I lost the ability to pull from the broker website all my historical account statements and all historical activity going back to when I first opened the account. Luckily, I keep good records, and have all of this information at my fingertips. However, it is important for long-term investors to choose a brokerage that provides you with all your account activity detail going as far back as possible. Otherwise, when you sell a stock that you have held for 20 or 30 years, figuring out your tax basis would be a nightmare. Tradeking does offer dividend reinvestment, but as I mentioned earlier, I typically reinvest dividends selectively.

As a result, I started adding all new funds to SogoTrade. I kept adding funds, until they made another change in their platform when they were purchased by Wang Investments in 2011. This change did not allow me to log in to my account for a day or two. After that, I was unable to withdraw funds easily. The process is still very cumbersome and one has to enter their account number twice, after they have logged on to the platform, in order to request an ACH transfer. In addition, changing your address is a very difficult thing to accomplish with Sogotrade. It requires you to download a form, fill it out, and then fax or email it to them. If you fax it to them, you run the risk of Sogotrade losing it, which is why it is best to email it. At $3/trade however up until early 2013, you could hardly beat them. Sogotrade does not offer fractional dividend reinvestment, but keeps all monthly statements going as far back as possible. A few weeks ago however, they raised their prices to $5/trade, although investors who pre-pay for trades could still end up paying as little as $3/trade.

For a new investor, I would consider Sharebuilder. They offer $4 trades if it is scheduled on a Tuesday. Sharebuilder provides free dividend reinvestment, fractional shares and offers historical records. Real-time trades used to cost $9.99, although this amount has decreased recently to $6.95/trade. My main problem with Sharebuilder was the fact that commissions were too high for real-time trades, and I didn’t want to be restricted to only trading on Tuesdays in order to get the low commission. Sharebuilder is ideal for someone who is just starting out dividend investing however.

Since my falling out with Zecco and Sogotrade, I have been adding new funds to Schwab. I still kept the old investments in the old brokerage accounts, but since I have new money coming it, that needs to be invested every month, I had to find a reputable broker. I like Schwab because they offer everything an investor can want, including research, a wealth of information, account records, dividend reinvestment and their customer service is very good. However, you do pay a high commission for this privilege. I do like the fact that Schwab is a publicly traded company, and that I can analyze its financials and monitor it closely. With Tradeking, Zecco and Sogotrade, I have no idea whether the companies are on the verge of bankruptcy. I also have an E*TRADE account, which provides a similar level of service as Schwab, but at slightly higher commission prices. I have mitigated the high commissions at Schwab by increasing my purchase or lot size per investment. If I bought shares in $1000 increments at Tradeking or Sogotrade, I now buy stocks in $2000 increments at Schwab.

As I discussed in an earlier article, I try not to invest more than $100,000 per brokerage, in order to add an extra layer of diversification to protect me against broker failures. While brokerage accounts are insured by SIPC up to $500,000, and most brokers also carry additional umbrella insurance, I find having multiple accounts helpful in case assets are frozen due to broker collapsing. Even if your money is SIPC insured, it could still take months before the money is recovered or available. If all of your funds are concentrated in one broker, you might be in a situation where you have a sufficient dividend income to pay your expenses, but you are unable to tap it because your broker failed.

Having many brokerage accounts is not too cumbersome. As a buy and hold dividend investor, I simply add up the total dividend income at tax time. I also try to keep certain securities such as MLPs and REITs in one specific account, in order to make it easier at tax time.

To summarize, while low commissions are important, they should not be the only factor in determining which brokerage to choose. Important factors include providing sufficient data support that would be beneficial during tax time, historical records, as well as a platform that is intuitive and easy to use. Automatic dividend reinvestment is an important feature as well, as is the ability to monitor your broker financial performance. As a result, I believe that Sharebuilder and Schwab are be the best brokers for dividend investors.

Full Disclosure: Long KMR

Relevant Articles:

Stress Testing Your Dividend Portfolio
Zecco Online Discount Stock Brokerage Review
- Reinvest Dividends Selectively
- Unlimited Free Trades at Zecco in October!

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