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Tuesday, February 23, 2010

The Challenge Project, Dividend ReInvestment Plan (DRIP), and Synthetic DRIP

"The difference between a mountain and a molehill is your perspective." - Al Neuharth

On February 18th, Scott left an interesting comment that has a direct relation on the "Challenge Project". It reads:

"I contacted ThinkorSwim and they said that Pension - their clearing firm does not buy partial shares.

I have my IRA account with TOS and was turning on DRIP for some select stocks I own and noticed I received cash for my position in PG.

This stock is in the low 60's currently and I do not own enough shares for a quarterly dividend to equal one share.

Have you mentioned or experienced this?

Thanks again!"

Wow. I found this one very interesting. In fact, it sort of threw me for a loop. I discuss this topic in the vlog entry below ...

(Video Included. If you're seeing this entry elsewhere and cannot see the Video? Click here to view the entry ...)



Here is a copy of the email I've sent to ThinkorSwim. I am awaiting a reply, but they're pretty good about getting back to their clients in an expedient manner.

"I would like to confirm that any shares that I hold in Account #XX______ are enrolled in DRIP, and that any dividends paid on this share of Coca-Cola (KO) would gain partial shares.

Per an email correspondence with Lila Frazier on 5/18/09, I asked:

“4) Does ThinkorSwim offer DRIP (Dividend ReInvestment Plan) on stocks that pay dividends and have a DRIP program? I own ___, ___, ___, ___, ___, and ___. At Sharebuilder, I have a straight buy and hold these stocks, when they pay dividends, the dividends are reinvested. What's more, I can turn this plan on and off with the click of a button. Does ThinkorSwim offer this option? If ThinkorSwim DOES offer DRIP on dividend stocks, does ThinkorSwim offer partial DRIP? In other words, could I say: I want 50 shares of FRO to pay me in cash, and 50 shares to be reinvested through the DRIP program?”

and the answer I received was …

In a tos account mutual fund dividends are automatically re-invested. For stocks you will need to request either on a stock by stock basis or for the entire account. Please let me know and I will take care of this for you. In addition we may not do fractional shares.”

I had assumed, as with most every other broker I've done business with, this meant that if an ACAT transfer was performed out of ThinkorSwim, then the partial shares would be sold off and could not be transferred. Especially since I had asked about ACAT within that same email. As I mentioned, this is rather usual with most brokers. Perhaps I should have inquired further on this matter. But I was assured that ThinkorSwim offers dividend reinvestment.

As I have mentioned in earlier email correspondence, I am just beginning to move some of my other brokerage accounts over to ThinkorSwim. There are still some accounts I am looking to perform an ACAT transfer into ThinkorSwim accounts. Some of the accounts that I hold at other brokerages, hold dividend investing stocks that are involved with DRIP. Therefore, instead of receiving a cash dividend, I just receive more shares of the company to compound the returns. I was going to wait a bit for those shares to DRIP in a few more shares, before I instituted the ACAT transfer to ThinkorSwim.

Then an acquaintence of mine who also uses ThinkorSwim got a hold of me, and stated that his shares weren't DRIP'd in his account, but he received straight cash. He tells me that when he inquired further on the matter, he was told that ...


"I contacted ThinkorSwim and they said that Pension - their clearing firm does not buy partial shares.

I have my IRA account with TOS and was turning on DRIP for some select stocks I own and noticed I received cash for my position in PG.

This stock is in the low 60's currently and I do not own enough shares for a quarterly dividend to equal one share"

So I guess I'm confused, and seeking clarification. It's impossible to be enrolled in a DRIP program, and not receive partial shares. If I had 4000 shares of Coca-Cola, and the dividend is 0.41 cents, then I this would equal $1,640 which when enrolled in the DRIP program would gain 30 shares and another 0.37037037 partial shares. Partial shares cannot be avoided when a stock is within a DRIP program, no matter the size of the position. Must the size equal one share? That's fine if so, as I will simply built my own 'synthetic DRIP'. I just need to know, before moving forward. So how is it that ThinkorSwim will go ahead and place stocks on a request basis within DRIP - but the clearing firm does not deal in partial shares?

Thank you in advance for clarification on this matter ..."


Once again, I'll let everyone know what I hear in regards to a response ...

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Note: This is not an investment or trading recommendation. The losses in trading can be very real, and depending on the investment vehicle, can exceed your initial investment. I am not a licensed trading or investment adviser, or financial planner. But I do have over 13 years of experience in trading and investing in these markets. The Challenge accounts are run for the education of other traders who should make their own decisions based off their own research, and tolerance for risk.



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