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

Monday, August 3, 2015

Create your own dividend ETF with Motif Investing

Motif Investing is an established brokerage which lets investors create their own portfolios, and purchase them for a set commission. Each investor can build a portfolio of up to 30 individual securities, and then purchase that portfolio for a single commission of $9.95. This works out to 33 cents per trade on 30 securities, which is cheaper than Interactive Brokers on a per-trade basis. If you were making 30 individual stock trades at Scottrade, you would have to pay $210. At Tradeking, you would have to pay $148.50 for purchasing those 30 individual securities. At Schwab, it would cost $268.50 to assemble a portfolio of 30 individual stocks.

There are no monthly fees and no account minimums, which makes Motif Investing a good broker for new dividend investors. Motif Investing also offers single stock purchases for a low price of $4.95/trade, which is relatively cheap as well. They do require a minimum investment of $250 to purchase a Motif. You can buy or sell Motifs for $9.95 or you can re-balance also for $9.95/trade. The brokerage is SIPC insured, which means that securities up to $500,000 are protected in case the brokerage firm goes under. They do not reinvest dividends yet, but this is not really an issue for me, since I reinvest dividends selectively.

These days, investing in exchange traded funds is all the rage. The problem with many of those funds is that they charge a commission to buy or sell, depending on the broker you use, and then they also charge an annual management fee on top of that. With a Motif, you can have direct ownership of up to 30 stocks reflecting one idea, you can have diversification across multiple securities, greater control over capital gains, and most importantly, you will not have to pay any management fees.

If you think about it, this service is pretty cheap for those investors who would like to build a portfolio by buying a basket of securities that fit their strategy. The baskets of securities that you can build are called” Motifs”.

Recently, I started using this service, and built and purchased my first Motif. The nice thing about it is that I was able to buy an equally weighted portfolio of several individual securities for just $9.95 in total. On a $2,000 investment, this one-time cost is less than half a percent. The nice thing is that this portfolio is instantly diversified, which reduces risk significantly.

I had been searching for a service like that for a long time. This is because I usually have a lot of ideas each month, but had to limit myself to only 2 – 3 each month in order to keep commissions low as a percentage of purchase price. I like to keep commission costs below 0.50%. Since I only have a limited amount of money to invest every month, and because I used to pay something like $5/trade before, I could only afford to make those 2 – 3 investments per month. This meant that I would only be able to purchase shares in a given company once per year. The drawback was that I would find a good company and add shares to it, but then it would go higher quickly, which meant that I couldn’t’ add more and I was left with a small position. I could purchase shares more often, I could have built a higher position and profit more.

With Motif investing, I could actually purchase shares in as many as 30 companies I like, and I can always change the list of companies I want to purchase when I have cash on hand. That way, I do not have to wait for 6 – 12 months, before I could add to my exposure in specific companies.

Opening an account is pretty easy and straightforward, as it requires the usual pieces of information such as name, address, social security information etc. I funded my account using ACH, which linked my checking to the Motif Investing brokerage.

I believe that Motif Investing could be useful to those investors who want instant diversification, more control over the types of companies they want to buy directly all in one low cost per transaction.

Currently, they have a promotion, where if you open a new brokerage account, and fund it with at least $2,000 within 30 days, you can receive up to $150 in cash. While Motif Investing offers Individual Retirement Accounts, unfortunately this offer is not applicable to IRA’s.

One qualifies for the bonus only after they make a few Motif investments. If you make 1 motif trade your will receive $50, while 3 motif trades will earn you a $75 cash bonus. If you make 5 motif trades you will receive $150 cash bonus. I believe that if you make 5 motif investments on a $2,000 account, this will be a good risk free return on investment of over 5%, which is not bad. ( $150 cash bonus minus 5 motif trades at $9.95 each, divided by $2000 cash deposit).

Overall, by opening an account with $2,000 and making 5 Motif investments, you will be able to earn a cash bonus of $150. This turns out to a return of over 5%, which is not bad. This of course is on top of the returns you will already generate from dividend stocks. I have learned never to despite the days of small beginnings. Again, this limited time offer will expire soon, so you have to act fast if you qualify. You can start by clicking on the banner below or by clicking on this link.

Full Disclosure: I will earn an affiliate commission for each customer that signs up for using Motif Investing

Relevant Articles:

- How to buy dividend stocks with as little as $10
- Best Brokerage Accounts for Dividend Investors
- Robinhood Brokerage Review
- Stress Testing Your Dividend Portfolio

Monday, June 22, 2015

The Best Broker for Dividend Investors: Interactive Brokers

For the first three to four years of my transformation into dividend growth investing, I managed to develop a process of identifying attractive companies with prospects for further increases in passive dividend income. I managed to pay very little in commissions, since I was using brokers such as Zecco, which offered approximately 10 free trades every month. Since then, I kept adding money to other brokers, but was not able to find another company which offered low costs for me. This resulted in limitation on number of companies I can invest in every single month, despite the fact that I usually had more than 15-20 ideas at all times. I felt limited in the number of companies I can purchase every month, given that most brokers:

1) charge somewhere between $5 and $10 per online trade these days,
2) the fact that I do not want to pay more than 0.50% in commission costs per each transaction, and
3) the fact that I have a limit on the amount of funds I can contribute each month,

I believe that looking for great investments is important, but so is keeping costs to the minimum. Dividend investing is a business, and as the business owner my job is to keep expenses to the bone.

Wednesday, May 13, 2015

Tradeking – Best Broker For New Dividend Investors

As many of you know, I have several brokerage accounts. In an earlier article I discussed that I do this, in order to protect my capital in the event that a broker I use fails. It would be unfortunate to be a financially independent person, but have my assets frozen for a few weeks, especially when I need that income to live off. As a result, my favorite exercise is to open a brokerage account, fill it up with $100,000 or so, and then use the dividends and new cash to open another brokerage account.

One of the brokers I have been using for the past 8 years is Tradeking. I think it is a good broker for new dividend investors, who are just starting out. The interface is user friendly, and the customer service is good. In addition, it has one of the lowest commission and other costs for new investors.

The nice thing about Tradeking is that it is also offering a $200 cash bonus for new investors who fulfill the following easy requirements:

1) Must be a new customer who opens an account by December 31, 2015
2) Must fund the new account with at least $3,000 within 30 days of opening
3) Must make at least 3 trades within 90 days of account opening
4) You must use the following link here

This is limited time offer, so you have to act fast if you qualify. After you meet all three requirements, you will earn a $200 cash bonus, deposited approximately 10 days after qualifying. This sounds like a very good return on investment on that $3,000. When I was building up my asset base, I frequently used bank and brokerage account bonuses to get “free money”. Even a couple hundred dollars invested wisely, could compound into a couple hundred in dividend income in the future. If you make 2 investments/month, this cash bonus is equivalent to receiving "free trades" for almost 2 years.

The account opening process is easy and straightforward. You need to add name, social security number, address and use one of the many funding options to fund your account. I use ACH, which allows me to link to my bank account.

Tradeking offers a low commission of $4.95/trade. This is one of the lowest commissions available to investors. With Schwab you pay $8.95/trade, with Scottrade - $7, while Sharebuilder or Merrill Edge charge $6.95 for a real-time trade. I prefer Loyal3, since it does not charge anything for an investment. However, the executions with Loyal3 are not placed in real time, and your investment choices are limited to 60 companies or so. With Tradeking, your executions are instantaneous, and you can invest in almost any stock listed on the NYSE or NASDAQ. In addition, you can buy ETFs or Mutual Funds. Your investments are SIPC insured up to $500,000. The company offers security, and I especially like the fact that they fill in schedule D for you at tax time.

These days, I do most of my investing using Interactive Brokers, which charges me 35 cents/trade. However, it requires a $10,000 minimum deposit and it charges you $10/month if your account balance is less than $100,000 or you spend less than $10 for commissions in that month. In addition, they cater mostly to the needs of more experienced investors. I know for a fact that some investors have found Interactive Brokers to be more confusing.

This is why I believe Tradeking is a better broker for those who are just getting started. Their customer service is top notch, and they have a lot of educational material available. In addition, you can reach customer service reps by phone, secure email or chat. In my interactions, I have found them to be helpful in ultimately resolving my queries.

TradeKing has received 4 out of 5 stars in Barron's 12th (March 2007), 13th (March 2008), 14th (March 2009), 15th (March 2010), 16th (March 2011), 17th (March 2012), and 18th (March 2013), 19th (March 2014), and 20th (2015) annual rankings of the Best Online Brokers based on Trade Technology, Usability, Mobile, Range of Offerings, Research Amenities, Portfolio Analysis & Reports, Customer Service & Education, and Costs. So you can say their customer service is on a good level, especially if you have a lot of questions.

Tradeking offers dividend reinvestment, or DRIPs for one or all securities you own. There is no cost associate with that service, and fractional shares are permitted. There are extra fees if you want to trade options – 65 cents per contract in addition to the commission of $4.95/trade. In addition, there is an inactivity fee of $50/year for those whose account value drops below $2,500. If you make one trade however, this fee is waived. The list of other fees is competitive, and pretty straightforward. They also offer IRA’s, without any annual fees as well. However, this $200 cash bonus offer is not available for new IRA accounts.

Overall, by opening an account with $3,000 and making 3 investments, you will be able to earn a cash bonus of $200. This turns out to a return of over 6%, which is not bad. This of course is on top of the returns you will already generate from dividend stocks. I have learned never to despite the days of small beginnings. Again, this limited time offer will expire at the end of December 2015, so you have to act fast if you qualify. You can start by clicking on the banner below or by clicking on this link.

Full Disclosure: I will earn an affiliate commission for each customer that signs up for using Tradeking.

Relevant Articles:

How to buy dividend stocks with as little as $10
Best Brokerage Accounts for Dividend Investors
Robinhood Brokerage Review
Stress Testing Your Dividend Portfolio

Friday, January 9, 2015

Robinhood Brokerage Review

Robinhood is a new broker, who lets customers purchase US stocks for no commission. Yes, that is true, customers pay no commissions when they purchase stocks using Robinhood. Unlike Loyal3, which also offers zero stock commissions, Robinhood offers access to almost all US traded stocks and the executions are real-time. With Loyal3, one has to wait for 2 – 3 business days before the investment is executed. However, Loyal3 is open to everyone right now, and has a lot of quality companies that allow purchases of fractional shares. All one has to do is have $10 to invest. Robinhood brokerage on the other hand is only available for a select number of customers today, doesn’t allow purchases of fractional shares, but executes trades right away. If this broker gets more established, I would put it on my list of best brokers for dividend investors.

There are several appealing factors behind Robinhood:

- Zero commissions on US Stocks
- No account minimums
- No Inactivity Fees
- No Deposit/Withdrawal fees
- Trades are executed right away at good prices
- Investor assets under $500,000 are insured by the SIPC

The items I don’t like are:

- Only available for a limited number of people
- Has not existed long enough
- Only available using an app
- Does not allow opening IRA accounts
- Does not allow automatic dividend reinvestment
- Does not allow purchasing fractional shares

The service is not available for everyone yet, but will be launched sometime in early 2015. Currently, there are several hundred thousand customers who are in their waiting list. I was one of those users, but I moved up by signing up early, sending out invited, and sharing the information using social media. Thus, once the service becomes more widely available, I believe it could provide much lower fees to many beginning investors. To me, it would be much nicer to be able to allocate $2,000 - $3,000 into shares of 10 – 15 companies every month without paying commissions, rather than be limited to 2 – 3 investments for that month. Long-time readers know that I do not want to pay more than 0.50% in commissions on my purchase amount, and I also rarely sell.

So I signed up and last month was approved for trading. The email stated that I had to sign up within 72 hours of receipt, otherwise they would put me in the back of their waiting list. I opened the account, went to the usual forms of identification ( address, Social Security number etc), and then had to link my bank account information. I decided to put $100 in the application. Robinhood is SIPC insured, meaning that I am safe for amounts under $500,000 there, but it still a new broker. Therefore, I am not going to trust a material amount of money with it, until they prove to me that they are worthy of my dollars. After all, zero costs are fine, but it is also important that their system doesn’t crash when I want to make investments. It is also important that they keep my money secure, so that the chances of a hack attack are reduced. After I signed up, and account was approved, they prompted me to download their app on my smartphone.

The trades are executed only through a smartphone. While the sign up for the account was on my computer, the trading interface is only through that app on the phone. I know that this will be a very appealing feature for many younger readers, who can trade on the go. With commissions at zero, many investors will probably start investing more actively, which is usually a recipe for disaster for 90% of investors out there. I am relatively young myself (or at least consider myself that way), but I do not want to just be limited to an application on my phone when it comes to investments. Plus, if the app crashed or is being updated, I would not be able to make investments. For a buy and hold investor such as myself, I can afford to wait for a few days or minutes. But still, if I do not have access to a website where I can download statements ( the costs of a website shouldn’t be that high relative to that for an app), I am not going to invest much there. I cannot take that chance.

So how can a broker offer zero dollar trades? I believe that this broker will earn money by routing orders to exchanges that pay them fractions of a penny for order traffic. The broker will also earn money by potentially matching high frequency traders with your orders. The high frequency crowd essentially front-runs individual investors to earn a fraction of a penny per share, multiple times per day. As a long-term buy and hold investor, I do not care whether I buy Coca-Cola (KO) at $37/share or $37.01/share. The only thing that matters to me is that I do not pay more than 20 times earnings for Coca-Cola and that the earnings per share can grow over time, in order to justify valuation and generate more dividend growth in the future.

Another way that brokers earn money is by charging margin interest rates to their clients. Many like Schwab for example charge anywhere from 6% - 8% for margin loans (buying shares with borrowed money). Given the fact that money is so cheap today, this is a nice profit for the broker. The other way that brokers earn money is by lending out your shares to short-sellers, who pay them a short rebate. If Robinhood can somehow gain scale, and attract a lot of investors that trade often, they should do pretty well for themselves, once their fixed costs are met. In the  business, a brokerage must meet steep regulation hurdles and costs, in order to handle client money.

The idea of zero commissions is very appealing nevertheless. If I were starting out today, and didn’t have a lot of money yet, I would use this application to build out a portfolio. I would watch out for other fees however. For example, it costs $50 to trade listed foreign stocks. It also costs $10 to make trades over the phone. Transferring securities out is another way where you will get hit by fees – there is a $75 outgoing ACAT transfer fee.

The idea of zero commission stock trades is not new. When I was first starting out with dividend investing, I used Zecco, which used to offer zero commission stock trades to investors. First they offered 40 free trades per month, then it was decreased to 10 trades/month. After that, the broker required a $2,500 minimum amount invested in order to be eligible for the free commissions, followed by an increase to $25,000, and then abolishing the free stock trades. Despite the increasing level of hoops however, for someone like me in the accumulation phase, it was helpful to be buying my first shares without incurring much in transaction costs. There are other companies like Wells Fargo and Merrill Edge which supposedly offer free trades every month to their customers. The problem is that there are just too many hoops to jump through. In the case of Merrill Edge, I have to have tens of thousands of dollars in a Bank of America account in order to qualify. The opportunity cost of $25,000 sitting in cash is higher than the $1 commission I pay at Interactive Brokers today.

I am going to keep a small amount of cash in Robinhood to test their platform. I bought a couple shares there, and the process was quick and efficient. Plus the prices I paid were fair. It was nice that I didn’t have to pay any commissions. Given the fact that this is a fairly new broker, that is untested, I am not going to put more than a few hundred bucks there. I have been using my broker Interactive Brokers as the main broker vehicle since the middle of 2014. I know that I pay $1/trade, which is more than $0/trade. In addition, for investors with less than $100,000 in assets there, Interactive assesses a $10 monthly fee. However I like the fact that my orders are directly executed on an exchange and that neither my broker nor a high frequency trader is trading against me on the order. I also like the fact that Interactive has been around for many years, is profitable, and very unlikely to go under and have my assets frozen for a period of time. I still keep under the SIPC limits there of course. It is very nice that I can buy shares cheaply at Interactive Brokers, and then transfer them to another broker that could have otherwise charged me $7 - $10/trade. It is also nice that Interactive Brokers charges around 1.50% on margin interest.

Either way, I am going to monitor Robinhood closely. In the future, once the broker becomes more established, I could start doing a more significant level of business there. Until then, I will keep my investing elsewhere.

Relevant Articles:

Best Brokerage Accounts for Dividend Investors
How to buy dividend stocks with as little as $10
Dividend income is more stable than capital gains
Never Stop Learning and Improving
How to retire in 10 years with dividend stocks

Monday, November 11, 2013

How to buy dividend stocks with as little as $10

Update 1/7/2016: The credit card option is no longer available. You can only purchase shares using your linked checking account.

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:

Check the Complete Article Archive
Do not despise the days of small beginnings
Ten Dividend Paying Stocks I purchased in September
Using DRIPs for faster compounding of dividends
Why Investors Should Look Beyond Typical Dividend Growth Screens

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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