Discount Broker Options for Dividend Reinvestment Investors

Written by The Dividend Guy on February 5, 2008

Dividend Reinvestment

Dividend reinvestment is one of the most powerful concepts in finance and investing. It allows for the concept of compoundingto do its work. A question I received recently from a reader (thanks Tim) concerning dividend reinvestment looked like this:

“I am in Canada and have been looking for brokers that allow dividend reinvestment. I am not interesting is using a DRIP just because of the time factor. Any suggestions?”

First off, I have used DRIPs in the past and stopped using because of the time factor. They are a powerful tool because you can buy shares and get dividend reinvestment for minimal fees, but it did take a lot of organizing and work to invest in them. I do not want to convince anyone not to use them because they are very powerful. It was a personal choice I made, similar to the one Tim is making above. I moved my money to the CSA, which I will talk about in a moment.

There was a good post done by Million Dollar Journey that provided a comparison of some Canadian discount brokers. In his table, he showed which of the brokers provided a DRIP program. Before I provide my suggestions for brokers, I need to explain these types of pseudo-DRIP programs, because they are not the same as a normal DRIP program.

Pseudo-DRIPs are dividend reinvestment options that are typically provided by the large discount brokerage companies and they allow people who hold dividend paying stocks in their account to sign-up for the ability to reinvest the dividends from their holdings into more shares of the same company. Sounds good right! However, the problem is that these pseudo-DRIP programs typically only allow dividend reinvestment to occur if the dividend received is enough to buy one whole share or more. In other words, they do not allow for fractional shares (i.e. 23.456 shares) in the account. That is the biggest downfall of these pseudo-DRIPS and what makes traditional DRIPs much better alternatives. These fractional shares can add up over time to some nice returns. So with that in mind, what are the options for investors who are looking for dividend reinvestment.

Canadian Brokers

If dividend reinvestment is very important to you, and you do not generate enough in dividends yet to buy whole shares of most dividend stocks, then my suggestion is the Canadian Shareowner’s Associations investment account. Their key benefit is they allow investors to hold fractional shares. The downside is they have a limited universe of stocks to choose from (they pre-screen stocks). This alone makes it not for everyone. However, I have found that many of the stocks dividend investors typically look for are on the list. I also hold a eTrade Canada account that I will use for other stocks or investments not available through the CSA.

The only other option for investors in Canada is with brokers such as eTrade or the big banks. Again, be sure to check out Million Dollar Journey’s table of Canadian brokers. My suggestion - go for the cheapest broker because they all tend to provide the same services.

U.S. Brokers

One thing the U.S. kicks Canada’s butt in is with discount brokers. There is just more of a market and more competition in The States, and it shows in the broker selection available. There is a site available that is one of the most comprehensive listing of discount brokers, with services and comments on pretty much everyone of them. The webmasters of this site have also created a page specifically focused on brokers that allow dividend reinvestment.

There are other options available however, away from the traditional brokers. The first is with FolioFn. FolioFn is a unique concept allowing investors to buy one security or a basked of securities, called a Folio. Their key advantage is that they allow investors to hold fractional shares. I have never used FolioFn.

The second option I found for dividend reinvestors is ShareBuilder. ShareBuilder has just been acquired by ING. They focus on the concept of automated investing. For example, if you are Procter & Gamble investor, you can direct $50 every month to dollar cost average into PG. Again, I have never used Sharebuilder but they seem like a good alternative.

If any of my readers have other suggestions for Tim, I encourage you to use the comments to let us all know. Have you used ShareBuilder or FolioFN? What other options are out there for both Canadian and US investors. I would love to hear from you.


Recommended: ING DIRECT makes $aving money simple! Open your account online today and start earning 3.00% variable APY. No Fees and No Minimums!

del.icio.us| Digg| Furl| Reddit| Google| StumbleUpon| Technorati| Help|

13 Comments so far

  1. MillionDollarJourney February 5, 2008 9:14 am

    Hey, thanks for the mention!

  2. Stocks on Sale » Discount Broker Options for Dividend Reinvestment Investors February 5, 2008 10:17 am

    […] unknown wrote an interesting post today onHere’s a quick excerptIf dividend reinvestment is very important to you, and you do not generate enough in dividends yet to buy whole shares of most dividend stocks, then my suggestion is the Canadian Shareowner’s Associations investment account. … […]

  3. MoneyMusing February 5, 2008 10:56 am

    I’ve been using Canadian ShareOwners for about a year now and will say that it really is a great way to get started in getting DRIPs going early. The quality of stocks available is generally good (especially Canadian equities) so there isn’t much need to look outside of CSA for quality dividend paying stocks.

    The one downside I’ve found with CSA is the lag time between funding your account and the fulfillment of orders. Depending on which stock you choose, you could be waiting a month for your order to be executed. This can tie up your cash for longer than you might have wanted. Instant trades are available, however run at $35/trade as opposed to $9.

    From what I’ve seen all orders are Market Orders so you’re at the whim of the value at the time of sale. This shouldn’t be a concern to long term investors. It could be seen as a good thing to avoid trying to “time” your purchase.

  4. Derrick February 5, 2008 11:16 am

    Intresting post about DRIPs (whole share vs fractional). But here’s a situation for comparison. Fractional DRIPs (via Canadian Shareowner) outside an RRSP vs Whole share DRIPs (i.e. other discount brokers) inside an RRSP. Which do you think would come out ahead?

  5. jl125 February 5, 2008 1:52 pm

    Love your blog. Tim, I am a US investor and like Sharebuilder. It is very user friendly. Another possible option is Zecco.com. They have ten free trades a month is your account is $2500 minimum. Otherwise each trade is $4.50 each. After ten trade it costs $4.50 each one. I am not sure about Div reinvestment but sharebuilder has it. good luck

  6. Dividendgrowth February 5, 2008 4:07 pm

    Jonathan from mymoneyblog had a good review about zecco:
    http://www.mymoneyblog.com/archives/2007/04/zecco-free-trades-broker-review-part-1-introduction-and-opening-process-overview.html

    No partial shares, sorry ;-(

  7. Jake (Dividend Investing Blog) February 5, 2008 5:57 pm

    I wrote an article about my experiences with FOLIOfn a few weeks ago. The link is below. I have used another one called Buy and Hold and I see they are still around. They are very similar to Sharebuilder, but they started to tack on fees which is why I left.

    FOLIOfn Review
    http://www.dividendinvestingblog.com/?p=16

  8. The Dividend Guy February 5, 2008 8:56 pm

    Thanks everyone for the comments.

    Derrick - I am not sure which one would come out ahead. Might be the topic of a future post - I would need to figure out how to build the model to see - any suggestions?

    MoneyMusing - good point about the market order and timing. I am at their mercy. I have never used the instant trade, but might consider it if my trade was big enough.

    Jake - thanks for the link to your article.

  9. Derrick February 6, 2008 11:17 am

    Maybe you can consider using dividend history for a variety of companies from different industries and run them through whole share DRIP vs fractional DRIP w/ varying tax rate? Then take like the average results from all companies and see how whole share DRIP (in RRSP) compare to fractional DRIP w/ varying tax rate. Essentially this is just a number crunching exercise, but the results might be interesting.

    The reason I ask is because say I already have a passive portfolio inside my RRSP, but am considering a dividend portfolio. Should I just start a dividend portfolio outside the RRSP? or should I convert some of my RRSP portfolio into a dividend portfolio? I’ll have to do more research and numbering crunching.

    Great blog.

  10. Steve February 6, 2008 12:02 pm

    I don’t know if this is available in Canada, but in the U.S. Schwab accounts offer free stock dividend reinvestement and buy partial (fractional) shares, so every dividend dollar (and penny) compounds.

  11. Gary Williams February 7, 2008 1:57 pm

    buyandhold.com for investors with a US address. Free dividend reinvestments, $7 monthly fee, first two trades each month are free, after that they’re $3.

  12. Gary Williams February 7, 2008 1:58 pm

    buyandhold.com also allows automated weekly or monthy investments.

  13. Gary Williams February 7, 2008 2:40 pm

    One more thing, buyandhold.com deals with fractional shares. No, I’m not affiliated with them, just a client. I’ll stop now. :)

POST A COMMENT

If you would like to make a comment, please fill out the form below.

Name - (Required)

Email - (Required but not published)

Website - (Optional)

ENTER YOUR COMMENTS BELOW






Student Loan

www.financialwebring.com