Thursday, May 9, 2013

Flexible Dividend Reinvestment Coming To Scottrade

Today I learned that Scottrade (the discount brokerage I use) will soon be introducing a unique dividend reinvestment program. Many other brokerages already provide the option for automatic and commission-free reinvestment of dividends back into the stocks that paid them. Scottrade will provide more flexibility by allowing automatic but selective dividend reinvestment: dividends can be reinvested into stocks other than the stocks that paid them. Here is an overview of the program from Scottrade's website:
Scottrade will soon offer a commission-free flexible dividend reinvestment program that will allow you to invest dividends from most dividend-paying stocks or exchange-traded funds that you own into most stocks or ETFs.

The program will be different from a traditional dividend reinvestment program (DRIP), which requires you to reinvest dividends back into the securities that paid the dividends. In the Scottrade program, dividends will accumulate into a pool of funds that you can use to purchase shares of almost any stock or ETF. The choice is yours.

The Scottrade program will provide significant flexibility and is designed to let you tailor your dividend reinvestment tactics to your overall investment strategy.
In a previous post I discussed why I choose to do selective dividend reinvestment by combining my dividends with new capital. I also wrote a Seeking Alpha article showing how the selective method can boost long-term dividend income compared with the traditional automatic method. The nice thing about Scottrade's program is that it would allow me to do selective dividend reinvestment when I do not have new capital to invest, as is the case right now. It would be particularly advantageous for my Roth IRA, where there is a cap on how much new capital I can add each year. I welcome this innovation and I look forward to learning more details about the program when it becomes available.

20 comments:

  1. DGM,

    I just very recently heard about this development. Very interesting indeed, especially for times where you have some dividends piled up but no new capital to infuse. Definitely seems like a great program!

    Best wishes.

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    1. DM: Yes, it does seem interesting. I hope they provide more details soon about exactly how it will work.

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  2. I just saw this, as well. I left Scottrade last year due to no DRIP options. There were some positions I just wanted to DRIP. I will definitely be back to Scottrade again after hearing this news.

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    1. DW: I like Scottrade but I've always wondered why they don't provide a DRIP option -- apparently it's been the most-requested change voiced by customers for quite a while. It's good to see they're finally implementing a program that is more flexible than a traditional DRIP.

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  3. That actually sounds like a good idea. Not having control over purchase prices is a huge turn off for me, seems this would overcome the biggest obstacle of DRIPing. I'm happy with my broker, but may look into this!

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    1. CI: The lack of control over purchase price is also a turn-off for me, but at least this new program allows people to target their dividends toward whichever stock they judge to be the most attractively valued.

      I probably won't use this program in my taxable account, where I'll be adding new capital on a regular basis (most of the time). However, it seems like it might be good to implement in my Roth IRA, where it could be several months between new capital additions due to annual contribution limits.

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  4. It is good that they are about to come with something like this. I just asked them a few days ago if they offered a DRIP, and they told me that they weren't. So I am glad to hear that they are going to provide something like this.

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    1. Martin: I agree, it's nice that they're finally offering a DRIP, which is something that's been available from other brokerages in one form or another for a long time.

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  5. I use Scottrade and this is an interesting program. I've always wondered why no DRIP was offered. Personally I'll probably still do like you and let my dividends build up and use to purchase whatever I'm feeling when I have enough new capital.

    I wonder what the fees will be for this DRIP option. Want to make sure we are keeping our costs low!

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    1. Dan: As far as I know, there will be no fees for the DRIP, but we'll have to wait for more details to know for sure.

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  6. If you Google Scottrade Flexible there are some details on the Scottrade site. It is indeed a no commission no fee feature. Limit orders on the reinvestment would be useful feature but might start to over complicate it. I think being able to invest dividends into new positions or focus dividends into more undervalued positions will be very useful. It will also allow me to rebalance my portfolio if need be.

    About time Scottrade

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  7. Anonymous: Thanks for your comment. The program does indeed look like it will have some useful features.

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  8. Scottrade is one of the most established online discount brokers in the United States. You can trade stocks at very low and competitive prices with this online broker.

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    1. NZD: I agree, Scottrade is a pretty good discount broker. I haven't experienced any problems with them and their website is easy to use.

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  9. They have been talking about this for years but still no action.

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    1. Anonymous: True, but given that they've posted something on their website, maybe it's actually coming soon.

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  10. I too was excited about the new "FRIP" from Scottrade. My only concern is how this could potentially affect my taxes. Obviously normal dividend taxes will still apply, I'm just worried of the cost basis tracking of the dividend reinvestment in the various securities. I use Turbo Tax to import my tax info from Scottrade, however, something tells me this could cause a nightmare at tax time...

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    1. Anonymous: Scottrade should be keeping track of your cost basis. If you go to "My Account" -> "Gain/Loss & Tax Center" -> "Gain/Loss Reports" you should see the cost basis for each of your stocks. I assume that when dividends are reinvested, Scottrade will automatically adjust your cost basis as appropriate.

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  11. I'm concerned about the following text in Scottrade's Terms of Use, "The FRIP does not qualify for the tax benefits of a traditional dividend reinvestent program under the IRS and securities purchased through the FRIP do not qualify for the same tax benefits as those purchased through a DRIP." Am I misreading something because this doesn't sound like such a sweet deal.

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    1. SDMairs: That text is curious because I am not aware of any tax benefits of traditional DRIPs, so it is unclear whether there are any real implications.

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