Should You Re-Invest Your ETF Dividends?

Ulli Uncategorized Contact

A few days ago, I posted about the tremendous increase in assets ETFs experienced over the past few years.

I also mentioned that, once pension plans and 401k make ETFs available to their investors, more money should flow in that direction. Several readers pointed out that a problem could be the transaction fees of ETFs for re-investing dividends.

I did not think that there were transaction charges for re-investing dividends; a call to my custodian (Schwab) confirmed that this in fact is true—no fees. If you have your assets housed with a different firm, you might want to verify this. Whatever you find out about this topic, I’d appreciate it if you would post your findings in the comment section below.

While on the subject, should you re-invest dividends at all? There are different views, and I understand all about compounding your earnings. However, if you are investing with a taxable account, you should definitely reconsider.

If you are invested in a no load fund or ETF that pays regular dividends, your year end basis calculations could be a nightmare, or at least require some time commitment on your part. Your tax preparer will not want to do it.

The other choice is, one that I favor, to let your dividends accumulate. They will earn interest in the money market portion of your account and compound that way. Once you have a more substantial amount collected, say a few thousand dollars, invest the lump sum.

This will also give you the opportunity to put your money in a different fund/ETF at that time, in case the one that generated the dividends is no longer a great performer.

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Comments 9

  1. Ulli,

    I have two accounts (one taxable, one not) with two discount brokers. I have various reasons for maintaining accounts with two rather than just the one. Here are my findings when researching two issues related to this topic: first, dividend re-investment for both ETFs and individual securities, and second, interest rates on cash held in the accounts.

    Ameritrade has only just begun to offer commission free dividend re-investing on both ETFs and stocks. They are now calculating and applying fractional shares of both varieties for their customers. But at this time not all ETFs, or stocks, are eligible for inclusion. For the record, I was told that Vanguard ETFs, including VTI and VB are among the eligible ETFs. Unlike mutual funds, Ameritrade does not offer a way to indicate that you want dividends re-invested at the time of purchase of ETFs. You must either navigate to a different section of the web site or call customer service. My personal experience with customer service at Ameritrade (now TDAmeritrade by the way) has always been satisfactory.

    Scottrade does not, and according to the broker working at my “local” branch office, has no immediate plans to offer commission free dividend re-investment of any type of investment outside of mutual funds. While this dissappoints me, I’m still a fan of Scottrade because they really hold the line on mutual fund transactions fees, just $17.00 per buy/sell or exchange (within same family). I know of no one else that even comes close to this for transaction fee mutuals (TDAmtrade is $49.95). And since I have a value bent to my investing preference, I must be able to buy/own Vanguard/Oakmark/Dodge & Cox et cetera and I don’t know of any discount brokers who offers these at NTF (Scottrade used to offer Vanguard and Oakmark at NTF until Jan. 1, 2004). BTW, I’ve always found that Scottrade has good customer service too.

    Now, about those interest rates on money sitting in your account. Both of my brokers have a tiered rate plan and quite frankly, it stinks. TDA pays 0.1% for cash balances below $5000.00. You read that right, 0.1%. Scottrade is only a little better (or worse depending on how you look at this) at 0.5% below $5000.00. At TDA you have to be sitting on over $25K just to get 1.65% for your money! And personally I would never have $5000.00 or more in cash sitting at my broker for very long, I would have to put it to work somewhere.

    Well, that’s enough for now. But there is a whole lot more to discuss on this topic IMO, like for example with a Vanguard MF account you get NTF buys/sells/exchanges, and while you’re on the sideline you can be in their Prime Money Market Fund which you can’t even buy at Scottrade or TDA. But that raises the issue of just how much, in the long term, you’ll pay for owning MFs vs. ETFs (fund expense ratios)…..and on and on……see what I mean.

    I guess for the time being I’m favoring dividend re-investment, and keeping my cash awaiting investment in one of those high-yield internet savings accounts. BTW, I do my own taxes so it’s only me that has to calculate all those “qualified dividends” (LOL).

    I recall you suggesting somewhere that in a 401k an investor should let contributions accumulate in MM until enough was available for new investment. This I agree with given that the company handling the accounts offers a prime MM rate for such contributions.

    So long for now,
    G.H.

  2. G.H.

    Thanks or sharing. I am sure as ETFs spread even further, changes in regards to fees for re-invested dividends will level the playing field among all firms.

    I am not certain why you pay a transaction fee to purchase a no load fund. I don’t follow other discount brokerage firms, but I am sure they operate in similar fashion as my custodian (Schwab) in that most of their funds are NTF (No Transaction Fee) and only some have a small fee attached to them. The NTF selection is large enough that I have never bought anything else in the last 15 years.

    Yeah, the money market options you mention are really crappy compared to the 4.5% offered by others. It won’t matter during times where you are fully invested in equity funds/ETFs, but it will matter once you are on the sidelines.

    Glad to hear you’re doing your own taxes; that way you know all about basis calculations for small amounts… 😉

  3. the best broker i found is tradeking. $4.95 per stock trade, $14.95 for mutual funds and about 4.3% for money market sweep account.

    dividends goes into money market account.

  4. Well, TradeKing certainly is a broker built for the lunch-bucket investor, and compared to other shops the fact that they will pay so much for MM cash is impressive.

    The trouble with outfits like TradeKing is, within 9 months after I would switch to or open a new account, Schwab or TDAmeritrade would buy them and then I’d be right back where I started.

    After spending some time at the Schwab web site it has become quite clear that with few exceptions (like TradeKing) unless you have a combined account value of half-a-million dollars or so you don’t have high yield MM as an option.

    Ulli, as an advisor do you have some sort of an arrangement with your custodian that allows you to receive high-yield MM rates in your client accounts that hold, say, less than $100,000?

    I’m still holding firm to my dividend re-investment philosophy. Even in conjuction with TTI investing.

    G.H.

  6. Ulli, you are right.

    I stumbled upon the wrong page(s) at Schwab.com and subsequently found the wrong information.

    A call to Schwab cleared everything up. It was an interesting conversation, and I’m currently chewing on the idea of switching.

    If I can’t negotiate a few changes with my current custodian it’s likely that I may be looking to hang my hat elsewhere.

    G.H.

  8. At Schwab, a good alternative to the MM is the SWYPX Schwab YieldPlus Investor Ultrashort Bond fund, which yields about 5.5%, and has no minimum hold period.

    Fidelity also has good rate of return on the MM funds.

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