Last week, I started a short series about dividend investing for beginners. I noticed that it had generated a few comments as I waved the first option that would be to start with stock picking right away. I still believe that starting with 1 or 2 stocks in your portfolio may put you at risk if you are just starting to learn the investing ropes and you are not fully aware of all the risks.
I remember when I first started trading back in 2003, I thought I knew how the stock markets worked since I was making money. I had invested a lot of money in oil income trusts and getting double digits dividends. I truly understood the meaning of trading stocks in 2006 when I pushed my luck to concentrate on trading penny stocks along with dividend paying companies. It would not have been that bad if I didn’t need the money 2 months after… to buy my house…
All that to say that when you start investing, you are better off with something that costs a little bit more (in transaction fees or management fees) but that is more diversified. But before picking any stocks, ETFs or mutual funds, you need an investment account. So how do choose the right brokerage house? Here are a few considerations before you make your decisions:
I guess that this is probably hits the nerve of all traders; the transaction fees! If you are going to buy and sell different stocks or ETFs you certainly want to have a low commission broker. This means you are better off with online brokers rather than the brokerage division of any big bank or financial institution.
You can usually find a low commission broker offering trades around $5. Here are a few examples:
If you are looking for more examples, you can always try Trade Wiser, a free comparable brokerage site.
Another important point is that your broker allows DRIPs (Dividend ReInvestment Plans). The fact that you can increase the amount of stock in your account through the dividends received is an easy way to increase the value of your portfolio steadily without fees. While most brokers allow DRIPs, it is very important to validate if yours does! I’d say that it is also important to confirm that your broker offer DRIPs for all stocks (some, for some reasons, offer DRIPs only for specific stocks). This will help you avoid potential problems with your investment strategy later on.
You can obviously make periodic investments with any mutual fund with any brokers. However, some brokers also allow periodic investments with ETFs. When I did my own research to open a new brokerage account, I noticed that not all of the brokers offer the same service with major ETF companies.
How are you going to do your research to pick the right investments? Looking at financial blogs is a great start but I would push my analysis a little bit further if I were you. Some brokers offer technical analysis services, graphs, historical and even financial analysts’ recommendations and reports.
While you can easily find stats such as dividend payout ratios, history, dividend growth and yield, a more in-depth analysis done by CFAs couldn’t hurt either ;-).
Since the goal is to do dividend investing, I would not pay more for a high tech technical analysis system. Your goal is to purchase steady dividend payers and not to determine if it’s the right time to buy or sell according to momentum.
My Brokerage Account
As previously mentioned in the comment of my first post of this series, I just opened my company brokerage account. Since we are generating enough profit and we don’t have any projects to work on at the moment, we decided to diversify our portfolio (limited to online properties at the moment) through an investment account.
I will principally invest in dividend paying stocks along with a few trades on techno stocks (covered by our other blog; Intelligent Speculator). We will be updating our portfolio on this blog so you can see our good and questionable investment decisions along the way ;-).
We have opted for Questrade since we are based in Canada and most brokerage accounts are offered by the 6 big banks. Questrade offers a low commission trade account with possibilities of DRIPs and periodic investments.
As for our research tools, my partner and I both work in the financial industry so it won’t be a problem to have access to a ton of information… which we will share on this blog 😉
What about your brokerage account?
Since it is impossible for us to look at all the brokerage account in details, we would like to gather as much information as possible on each brokers so we can put together a “best broker page” with your comments. So tell me what you like and dislike about your brokerage account and we will add your comments to our best broker categories.
I just opened a Questrade account and I’ve been happy so far, although I’ve only made two trades. One of the trades was a purchase of some shares in an ETF, so I looked into Questrade’s DRIP program. Turns out that your dividends must be at least the price of one share in the stock from which they came in order to automatically reinvest them, otherwise you’ll just have to do it yourself, with fees. This seems strange to me, as it would be very difficult to get enough dividends from a single stock to buy a share of that stock (eg. cents per share is always less than price per share). Perhaps there’s a catch I didn’t read about; maybe you can pool your dividends from all stocks to buy a share of one stock.
@Michael A – I was just logging in to comment on the same exact thing – unfortunately you do need to have enough built up dividends to buy a whole share with unfortunately I think, defeats the purpose.
You actually have to buy an actual share, and then open up an account with their carrier service in order to have the DRIP the way you’re thinking (and I’m thinking) for individual stocks.
yeah, unfortunately, it’s not that easy. I guess you are better off with periodic investment to increase your liquidity faster and buy more stocks.
I’ll write more about my Questrade account and how I manage it in the upcoming weeks. there are no perferct brokerage account but I think this one is not bad considering the fees and flexibility.
The Passive Income Earner
For small amount of money, DRIP is tough in a broker account. You need to use Transfer Agents such as Computershare or CIBC Mellon which will re-invest fractional shares. It’s a different setup but worth it in my book. I just mailed 4 cheques (60$, 55$, 55$, 45$) this morning to add to my positions at no fees! (except for the stamp)
I built a spreadsheet of stocks I track along with their dividends and how much I need to DRIP a full share. I mostly did this initially for my TFSA since the max is 5000$ per year. This allowed me to plan my investments as DRIPing is a key aspect of my investing.
I’m rather new to the world of investing and am, myself, “investing with less than $1000”. I opened an account with ShareBuilder.com. There are a few things that drew me to them – first, no minimum opening amount (I didn’t have much to begin with… TECHNICALLY I opened with $0 and made a deposit a couple days later). As an added bonus, I was able to get I believe $50 free added to my account after my first transaction due to a promotion (that they seem to have often).
The free account there has fees for real time trades at $9.95 and automatic investments (which do not need to be full shares; partial shares are available) are $4, but for $12 a month the real time drops to $7.95 and you get 12 automatic investments free each month, and any after the 12 are $1 each.
There are often coupon codes available (watch sites like retailmenot.com) that allow for free trades… As it stands for me now, I’ve only actually paid for 4 trades out of the dozens I’ve done since I opened it (let me repeat – for an account I’ve had for about 6 months and have done dozens of trading, I’ve paid a whopping *total* of $39.80 in fees, and they gave me $50 in promotion cash…).
My favorite part of all is that by DEFAULT, all dividend paying stocks, ETFs, and funds automatically reinvest dividends in the same share the dividend was paid from (partial shares can be bought as such). If I chose to not auto reinvest, the dividend goes direct into my account and can then be invested (via realtime or automatic investment) into any other share.
When selling, as long as I’m closing my position on a particular stock, I can sell partial shares just as well (although they sell at the day’s closing price, unfortunately). At any rate – I’m a huge fan.
It is a very interesting comments site. I have a question, maybe one of you may have the answer. I am a Canadian citizen and I am trying to open an account with the less possible fees. I have found Sharebuilder, OptionHouse, TradeKing Zecco, etc… but they answered me that being a Canadian I can not open an account.
Do you know why Canadians are banned from those sites?
I know it is related to laws. In fact, a US resident cannot open a brokerage account with Canadian firm either.
This is why I made the distinction between US and Canadian broker deals in this post. My pick would be Quest Trade as they are among the cheapest in term of comission fees. Plus, they presently give a bonus if you open an account right now (click on the banner and you will get all the details).