Wednesday, November 5, 2014

Three Commission Free Investments and a Dividend Increase

Many readers know that it is possible to invest in some of the best blue chip dividend stocks without paying any commissions by using Loyal 3. There are plenty of companies like PepsiCo (PEP), Coca-Cola, McDonald’s, Unilever to name a few, where a beginning dividend investor can set up to invest anywhere from $10/month to $2,500/month. This is all commission free, and ideal for setting up a monthly investment plan with those companies. I believe that the most important part of investing is continuous education, and starting as early as possible, in order to enjoy the longest compounding of capital contributions possible. Even a small seed can turn into a mighty oak, which is why one should never despise the days of small beginnings. It is very important to invest a set amount in quality blue chips every month, reinvest dividends, and patiently sit on the companies you own for as long as possible. This is how wealth is built for ordinary investors.

With services like Loyal3, any investor who has at least $10 can invest in individual dividend paying companies, provided they like the valuations. Granted, the number of companies they offer is limited to less than 60, which is why investors who can put at least $1000/month might be better off opening a discount broker account like TradeKing and do their purchases that way. In addition, the executions take approximately 2- 3 business days. For that reason, I do very little investing using Loyal3. I am essentially buying small chunks every month, but my dividend stock investing is done using a discount broker like Interactive Brokers.

In the past several months, I have been adding up shares in the following three companies using Loyal3:

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 increased dividends for 39 years in a row. The company’s most recent dividend increase was by 4.90%. I am telling this because the earnings and dividend growth has slowed down considerably in the past few years. The stock is selling for 18.50 times forward earnings and yields 3.60%. Check my analysis of McDonald’s.

Unilever PLC (UL) operates as a fast-moving consumer goods company in Asia, Africa, the Middle East, Turkey, Russia, Ukraine, Belarus, Europe, and the Americas. The company operates through Personal Care, Foods, Refreshment, and Home Care segments. This international dividend achiever has increased dividends for at least 19 years in a row. Over the past decade, Unilever has managed to boost dividends by 6.10%/year in Euros. The stock is selling for 19.20 times earnings and yields 3.80%. Check my analysis of Unilever.

The Coca-Cola Company (KO), a beverage company, manufactures and distributes coke, diet coke, and other soft drinks worldwide. This dividend king has increased dividends for 52 years in a row. The company has managed to increase dividends by 9.80%/year over the past decade. The stock is selling for 20.30 times earnings and yields 2.90%. Check my analysis of Coca-Cola.

The drawback of Loyal3 for some investors is that it doesn’t allow automatic dividend reinvestment. However, if earn cash dividends earned in Loyal3, the cash will be used towards your next purchase there. For a new investor putting $50/month in 6-8 companies, it would take less than an year before monthly dividends exceed the $10 needed to make a one-time purchase commission free. That would be the nice part where a portion of monthly contributions are self-funded through dividends. It would also be pretty illustrative and motivating for the investor that the dividend machine they set up is now growing on its own, without much additional capital.

Another company I own that is not available through Loyal3, Aflac (AFL), raised dividends by 5.40% to 39 cents/share. This marked the 32nd consecutive annual dividend increase for this dividend champion. However, the most recent history of dividend increases has been pretty disappointing, when compared to the 16.80%/annual dividend increases enjoyed by shareholders over the past decade. That being said, the stock looks cheap at 9.70 times forward earnings and a current yield of 2.60%. Since I have a high allocation to Aflac, I doubt I would do much buying in the company. I like Chubb (CB) better, especially on dips. Check my analysis of Aflac.

Full Disclosure: Long everything mentioned here

Relevant Articles:

Qualitative Dividend Analysis of Aflac (AFL)
Chubb Corporation (CB) Dividend Stock Analysis
How to buy dividend stocks with as little as $10
Return on Investment with Dividend Stocks
The Tradeoff between Dividend Yield and Dividend Growth

22 comments:

  1. I do my stock investing through computer share, which has hundreds of companies to choose from. You can sign up for automatic investment and dividend reinvestment.

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    Replies
    1. How easy is it to track positions that way? Do you get one 1099, or one for each company you invested in? Isn't it a pain to track that many separate companies?

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    2. Hi, Dividend Growth Investor.
      I've been using Computershare since I started investing back in 2004. Transaction history is available, but the tracking is rather cumbersome and requires a fair amount of clicking. You will receive a 1099 for each company that you are invested in, which is both good and bad. My dividend schedule a couple years ago was pretty long. Some stocks have very low (or zero) transaction costs, but others are onerous, which has lead me to move some positions away from the service (VZ is a good example). Cost basis is frustrating (and requires manual calculations) for any company that I purchased prior to the new cost basis rule going into place. I'm choosing to use Sharebuilder for most of my new positions, but I wouldn't be opposed to initiating on Computershare if the fees were zero for both purchase and reinvestment. Hope this helps. Take care.

      Goosemann Jones
      Flight to Dividends Blog

      Delete
  2. I suggested to Loyal3 that they provide investors with the option of combining monthly allocations with recently-received dividends. In other words, if you've set up a plan to invest $25/month into McDonalds, and your cash account has $5 from dividends received recently, then your next monthly stock purchase would be $30. This would be a back-door method of reinvesting dividends. The Loyal3 contact said they would consider the feature, but that was months ago.

    As it is now, if I've designated $25/month for auto-investing with Loyal3, and I have $25 in my cash account thanks to dividends, they won't charge my credit card for that month's investment. That means the money I've allocated for investing is sitting idle--not good. For now, I monitor my regular purchases and if they're ever less than what I've budgeted, I invest the difference somewhere else. It's the same end-result, except it deviates from the autopilot mode of investing that I far prefer.

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    Replies
    1. Well, if you monitor your Loyal3 account, you can essentially make a purchase into whatever company you want as soon as you earn say $10 in dividends. Or alternatively, say you earn $5 in dividends, then make a $10 purchase in a company using checking/credit card. Loyal3 will use the dividends and the remainder will come from the checking/credit.

      While automatic dividend investing could be really helpful for many, I doubt you lose from compounding if you invest the cash next month rather than right away.

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  3. How messy is Loyal3 at tax time? The reason I haven't used Loyal3 yet is that I like to do my own taxes, but I'm a bit worried about all of the dividend payouts and partial share purchases, which might make the cost-basis reporting a nightmare for me. Your experiences?

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    Replies
    1. If you plan to buy and sell shares using Loyal3, then your cost basis and fractional share concerns might be something to consider. If you plan to put $10-$2500/month in a company for several years, and hold on, then I don't think it would be an issue.

      Last year I started with Loyal3, received some dividends and then got a 1099. I didn't sell anything. Under the new laws, they send you cost basis information on shares sold. If you keep holding, you don't care about bases.

      Delete
  4. I made a transfer on 10/31 and as of today 11/5, the trade has not executed yet.
    When I checked my total account value, it had the funds and the money was taken out of my checking account, so I know that they received the money. When I called today, they stated that they did not receive the transfer of funds yet. Doesn't make sense as my funds were out of my checking account since 10/31. There is something more to this and they are not telling the investor.

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    Replies
    1. HBKid,

      You need some patience - you have initiated that transfer approximately 2-3 business days ago at the time of your comment.

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    2. I also think their ACH transfer is VERY slow, but it will show up eventually. You have to figure that 10/31 was a Friday so the 3 business day window probably didn't start till Monday 11/3 and the trade was done on Thursday 11/6. I think they probably make a little money on the float between when they get the money and execute the trade. It is the same if you have some cash in your Loyal3 account and want to make a larger purchase that needs some checking funds, they take your balance from the Loyal3 account immediately even though the trade isn't going to happen for 3-4 days. For example, if I had $900 balance in my Loyal3 account on Monday and I put in an order to buy $1000 of Kraft, then the $900 would be dropped to zero immediately and sometime on Thursday after they had pulled another $100 from my checking the trade would be made. Frustrating? Yes, but I am still using it because the trades are free.....

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    3. I forgot to mention that Loyal3 also pays their dividends slow. I have YUM in my Tradeking and Loyal3 account, their last dividend showed up in my Tradeking account on 11/7 and money was reinvested. As of today they haven't shown in my :Loyal3 account. I guess they wait the 3 full day clearing period? I also wish they showed current cost basis, but enough complaining, you get what you pay for, right? :-)

      Delete
  5. Loyal3 has phased out allowing investors to use credit cards to purchase. Need to link to a checking account.

    ReplyDelete
    Replies
    1. Actually you can still make purchases with credit cards, but the limit is $50 per investment, per transaction. It is possible to buy a position in company by setting up a monthly investment at say $50, have it executed, and then the next day change the investment date to the day after and buy another $50 with a credit card. Is it worth the hassle - it is up to the individual to decide.

      Since Loyal3 caters to newbies, I don't think they should be allowing credit card purchases to begin with. I know most people have terrible records with credit cards.

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    2. Just received an email today that said Loyal3 is going to end all credit and debit card transactions by 12/11/14 due to gaming of the system. I guess the old saying is true, a few bad apples spoil the bunch.

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  6. DGI,
    I'm long all 3 stocks that you mentioned, and just purchased additional shares of UL. As far as Loyal3 goes, I believe that it's a great way for young investors to get started. I wish my daughters would use it to sock away a few dollars every month.
    Thanks,
    KeithX

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    Replies
    1. DGI,
      I am confused on UL. Based on the fact that UL cut its dividend, wouldn’t that be grounds on selling the stock?
      I know you have discussed selling a company that has cut its dividend immediately but you have bought the stock. Also, looking at the dividend history closely, it show that UL has been inconsistent and up and down with their payments. Maybe I’m missing something here because of the company being located outside of the US.

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    2. HBKid,

      For international companies, you need to look at dividend history in the local currency, not US dollars. For Unilever, dividends are declared in Euro's. The payments in British Pounds and US Dollars will fluctuate, but those in Euro's have been increasing steadily.

      http://www.unilever.com/investorrelations/shareholder_info/dividends/nvsharedividendhistory/

      You also have to account for recapitalisation/split in 2005. Basically dividends paid in 2005 and prior should be divided by 3 to come to a comparable amount.

      Reading annual reports is helpful: http://www.unilever.com/images/ir_ar08_annual-report_tcm13-163124.pdf

      Check page 157

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    3. Keith,

      I wish Loyal3 existed when I only had very little money to invest. I would have been able to slowly build my portfolio much earlier. I wish you good luck teaching your daughters how to become responsible adults financially!

      Dividend Growth Investor

      Delete
  7. Loyal3 does actually reinvest dividends for certain companies. Kraft and Frontier Communications are two examples. I just got a 48c dividend from Kraft and it turned into 0.0084 more shares. I do not plan to sell anything in this portfolio for a very long time, so immediate tax implications are almost nil. Loyal3 will send a 1099-DIV, which is easy enough to report. When I do sell, however, I hope that they at least allow me to export all my fractional purchases into a spreadsheet so I can calculate the various dates and cost bases averages.

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    Replies
    1. Thanks for your comment. I also find it an inconvenience that they do not provide the option to download information to a spreadsheet.

      Best Regards,

      DGI

      Delete
    2. My Kraft dividend was also reinvested. Out of my 20 companies that I am investing in via Loyal3 that is the first one to do that. My goal was to get to a position where my monthly dividends were producing a minimum of $10 so that I could make at least one self perpetual purchase monthly, then it will be on auto pilot for the most part.

      Delete
  8. Hi, Dividend Growth Investor.
    Thanks for the overview on Loyal3. I have one stock through the site (BUD). I make monthly purchases via my checking account. It's odd, though, because I moved some cash to Loyal3 thinking the cash would constantly replenish itself each month, but it is instead just bleeding down the cash to make purchases. Your post helped clear this up and I suppose it won't pull from my checking account until the balance gets to zero. Take care.

    Goosemann Jones
    Flight to Dividends Blog

    ReplyDelete

Questions or comments? You can reach out to me at my website address name at gmail dot com.

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