Earlier this year, I decided to max out any tax-deferred accounts I am eligible for. This included 401 (k), Sep IRA and ROTH IRA. My goal is to not only have a diversified income portfolio, but to diversify from a tax perspective as well. At the beginning of September, I tweeted about purchasing shares in ten attractively valued companies in my Roth IRA. The Roth IRA has several very appealing features such as tax-free compounding of capital, distributions are never taxed and there are no required minimum contributions.
I allocated $2,000 to the purchase of ten securities in September, and have $3,500 more to invest until the contribution limit of $5,500 for 2013 is exhausted. The brokerage used to execute this transaction was Sharebuilder. I believe that this is the best brokerage to use if you are just starting out your dividend investing journey and have low initial amounts of capital to invest.
It is important to maintain low costs when purchasing dividend paying stocks. As a rule, I try to avoid paying more than 0.50% in commissions on my purchases. With my regular accounts, it is easy to achieve that if I pay less than $5/trade and invest at least $1,000 at a time. With Roth IRA’s however, the $5,500 limit makes it difficult to invest in more than 5 – 6 companies/year at such commission rates. Since I have much more ideas than that, and since I wanted to have a diversified allocation each year, I decided to buy a greater number of companies. I signed up for Sharebuilder’s automatic investment program, which charges $12/month for 12 automatic monthly stock purchases. These stock purchases are executed on Tuesdays, with the automatic investment program. I also wanted to build the allocation over a period of time, rather than in a lump sum. I am allocating $2,000 in September, $2,000 in October and $1,500 in November. Since the first month of signing up was free, I am essentially going to end up spending $24 to invest $5,500, which is only 0.43%. After that I am going to cancel the service, until I am ready to put the contributions for year 2014 to work.
I purchased shares in the following ten companies in early September: (open link in another window)
Full Disclosure: Long all stocks listed in the article
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JNJ and TGT look good to me too. I'll probably pick a few shares up soon with the dividend from INTC. ;)
ReplyDeleteThanks for your comment on RB40.
Thanks, DGI. I've begun to rotate back into some consumer stocks and five of your ten are in that sphere. This was helpful and timely.
ReplyDeleteAnyone know why I can't see the table? I'm a regular reader of this blog (thanks!) and have never had an issue until now.
ReplyDeleteI'm surprised you didn't focus on purchasing higher yielding securities (4%to6%)in the Roth to take advantage of the reduced tax on the dividends up front. Was that a consideration? Or were you more interested in adding to these specific securities as opposed to purchasing more of any higher yielding stocks you already owned?
ReplyDeleteIt would be interesting to know how many shares you purchased of each stock.
ReplyDeleteHave you considered Interactive Brokers?
ReplyDeleteThe minimums are higher (10k for taxable account and 5k for IRA), but you can do stock trades for around $1 each.
I do some options trades and they are very competitive in their pricing so I opened an account there for some dividend growth stocks and options trades.
At an average of $200/company, are you worried that you it may not even have been worth it to start a position at that amount? I ask because when I started DGI in my Roth in May, I considered doing the same thing but found it more cost effective to transfer money from my IRA to my Roth, pay the taxes now (out of pocket), and have a greater amount of capital to allocate towards shares.
ReplyDeleteRBy40,
ReplyDeleteThanks for stopping by friend. I hope your income investing is profitable!
Ted,
I am eyeing consumer stocks, but they do look fully valued to slightly overvalued. I hope investors start hating them at some point over the next 2-3 years.
John,
Try using a different browser.
Anon,
My goal is to buy shares in companies that would grow their dividend over time, not chase yield. With a growing dividend, my income maintains purchasing power and my share values maintain purchasing power as well. You can also check the analyses behind each stock, to understand what I think about them.
Keith,
Based on the information I provided, it would be really easy to calculate number of shares. I sincerely doubt this would have any benefit to you however. This is why I usually do not talk about dollars I invest, because everyone's situation is different.
Last Anonymous,
I have considered IBKR, however I was turned off by their monthly charges. With Sharebuilder, I can cancel those monthly charges, whereas with IBKR i cannot.
BidAsk Dividends,
ReplyDeleteYou are probably not subscribed to my mailing list, but I already had positions in the ten stocks listed above in my taxabale and other tax-deferred accounts.
The current article is an exercise in building a portfolio from the grounds up. It is much better to buy shares in 10 companies at $200/each, than to own shares in 2 companies at $1000 each (assuming all are attractively valued quality ideas). If I was just starting out, this is how I would do it.
Actually, when I was first starting out with dividend investing, I put about $100-$200 in several companies per month. My brokerage didn't charge any commissions on 10 trades/month though..
Many of the companies I was buying in those early years are still part of my buy list from time to time.
I am also considering investing my taxable contributions in a similar way.
For several years i would buy stocks in $1000 - $2000 increments per position. Since I have 10 -15 ideas at all times, this could mean I might wait for several months before I have the cash to buy idea number 15. At that point, this idea might be overvalued and no longer interesting to buy. I am currently starting to think differently, and probably investing my monthly contributions in this way in my taxable brokerage deals.
As I mentioned earlier, if I can keep commissions to below 0.50% overall, it is better to invest $2000/month in 10 companies than investing it in 2 companies.
Your second point about converting IRA to ROTH is something that would not work for me. I am glad it worked out for you.
Just picked up some TGT yesterday!
ReplyDeleteothers could take a look at optionshouse, no fees, dividends can be reinvested for free and into fractional shares and just 3.95 per trade... plus the interface isn't too hard on the eyes.
ReplyDeleteKeith has a good point, DGI. Correct me if I'm wrong, but according to my reckoning, the face value of your shares was $755. With $2,000 purchasing power, you bought a maximum of four shares in a couple of companies and in some companies only three shares or, perhaps, only two. This is hardly what a serious investor would consider a wise investing. Yes, you may claim to have a blue-chip portfolio of heavyweights, but with only a few shares in all the holdings, it seems to me to be a scatterbrained approach.
ReplyDeleteGeorge, please read my responses above.
ReplyDeleteIf you have George, please understand that the most important thing about dividend investing is to get started. If you put $200/month in dividend paying stocks, you are ahead of the game. If you put $200/month for 15 years, you would be making over $265 in monthly dividend income in year 15 ( assuming 4% yield, 6% dividend growth and dividend reinvestment)
You are obviously missing the forest for the trees. You do not need a lot of money to start investing in dividend paying stocks.
It is much better to buy positions in ten companies with $2K than in 2 companies. If that does not make me a "serious investor" in your eyes, I can live with it.
DGI, thank you for your response. I agree that starting minimal positions in 10 companies is much better than 2 large ones, that is why I transferred money over. Luckily? for me I am in a lower tax bracket and it was advantageous for me to do so. With my brokerage charging $7.95/trade, I need to minimize fees best I can, especially with a max of $5,500 to work with. But as you note, you need to start somewhere.
ReplyDeleteDGI: You wrote -- It is much better to buy positions in ten companies with $2K than in 2 companies.
ReplyDelete---------------------
Why is that so? You're blowing your money on transaction fees. Assuming you're paying $6.95 per transaction and get a share for $80, your outlay is $86.95. The cost value of your one share has to increase 8.68 percent before you break even.
Your dividend payment is minuscule.
On the other hand, if you bought 25 shares for $80 your outlay is $2,000 and, with commission, is $2,006.95. Your 25 shares have to increase only 0.3575 percent for you to break even. And the divdend payments are commensurate with having 25 shares.
While it may be gratifying to look at a portfolio that contains 40-50 equities, if all the holdings are of a couple of shares here and there, it's just ridiculous.
Seems to me you're chucking your money at everything that moves with the hope that something sticks. And that's not an intelligent approach, by any means.
I'm not faulting your choice of companies, but your decision to buy one or two stocks here and there, doesn't pass the financial litmus test.
Gotta disagree with you DGI and agree with George. Buying one or two shares in a company is no to build a portfolio. Each to his own, though, but it's the investor who buys a block who gets ahead both from the dividend return and growth standpoints.
ReplyDeleteYou are making a dumb argument. If you make small purchases in companies over a period of time, and you compound your money, you will get ahead. If you think you need to start with a five or six figure portfolio at the beginning, you will never amount to much.
DeleteHi George,
ReplyDeleteIn the article, I specifically outline that to buy 10 companies and put $200 in each ( $2000 total), I would pay $12 with Sharebuilder.
I specifically mentioned this:
"I am allocating $2,000 in September, $2,000 in October and $1,500 in November. Since the first month of signing up was free, I am essentially going to end up spending $24 to invest $5,500, which is only 0.43%."
Therefore, I am not squandering money on commissions. Please read articles in entirety before commenting. That is the most efficient way of using everyone's time.
Also, I have addressed your other question on why 10 is better than 2 in the comment section above.
Best Regards,
DGI
I completely agree with you DGI on your decision to buy 10 companies at $200 each rather than 2 companies at $1k each.
ReplyDeleteSo what if your positions in each company are small. You are still getting the divs from each individual position is small, your overall yield is still going to be about the same unless one of your positions cuts their div and in that case it will only effect 10% of portfolio instead of 50%.
Anyone who thinks you have to have a lot of money invested to start diversifying has either never tried to start investing with a small amount of capital or did not use their small amount of capital in what I would consider the best way, but it is their money so they can spend it how they like.
Regarding the commissions that you have paid it seems like you have actually paid less in fees than the you would have with the approach that George has suggested. Now maybe he is better at math than I am but it seem to me like the 10 free auto investments < $6.95*2.
Also, since you are using Sharebuilder, if you are investing anything in taxable account there are a still few free auto invest codes that are still valid if you have not used them already that can save you even more in commissions than you already are. I have not found any that work inside my Roth yet though.
DGI,
ReplyDeleteAs a beginner dividend growth investor, your strategy makes perfect sense to me. As an exclusive roth investor (company 401k's aside), there is really no other way to build a diversified portfolio. I had the same concerns that others have commented on when I made my first roth contribution earlier this month- is it really worth buying only 4 shares of CVX or 6 of JNJ...the yearly dividends won't amount to anything.
In the end, I decided on splitting the $5,500 yearly limit into 11 companies, giving me ~$500 positions. I will do the same for my wifes roth (yet to be opened) by the end of the year. My ultimate goal is to hold 3 or so stocks in each of the 9 major sectors, so each year i will chose to grow positions i already hold that are at fair values, and likely open up a few new ones also. To me, this makes a lot more sense than starting out with more sizeable positions in only a few companies, and only adding several each year...it might take 10 years before you would really be diversified.
I avoided fees with a new account promo from TD, and hope to do the same with my wife's account later this year. This way, I've diversified for "free" and will make larger purchases down the road when I do have to pay a commission.
Also, huge thanks to you, along with a few others, that got me started on this journey. Your blog has been a fantastic resource for someone just starting out with DG investing.
How can you max out both your SEP IRA and your ROTH? I thought both those accounts had a combined contribution limit of $5,500?
ReplyDeleteBuy and hold is a lot better site to use to buy stocks at a lower fee. They have only 3 trade windows per day but have been around since 1999 and I was one of the very first users of the site and still am. Give it a shot folks
ReplyDelete