Ameritrade's Lucrative Little Secret
By Chandler Lutz
Dividends can be a powerful part of every portfolio. Dividends provide investors with a guaranteed source of income, help reduce volatility, and give investors another tool to which they can judge the quality of a company. In fact, the dividend is “realest” metric an investor can use because there is no way a company can use shady accounting practices to manipulate dividends like they can alter earnings.
As powerful as dividends are, they are much more powerful when they are reinvested. As Joseph R. Trigue states in his book S&P's Guide to Building Wealth with Dividend Stocks, the S&P 500 indexed returned 370.2 percent between 1983 and 2003 which translates in a return of 8.1 percent per year. However, if all the dividends were reinvested over that same period, the total return by the S&P 500 index balloons to 884.2 percent or a 12 percent a year return. Basically, if you invested 1000 dollars in the S&P 500 index in 1983 and did not reinvest the dividends by 2003 you would have a very reasonable 4702 dollars. However, if you reinvested the dividends your small little 1000 dollar investment would be worth a much more exciting 9884 dollars. With the reinvested dividends you could have doubled your money!
Ok, if you weren’t already convinced about the power of reinvesting dividends, I hope you are now. The next obvious question is how does one reinvest these dividends? If you have a small portfolio, is doesn’t make sense to pay the commission from your normal broker (i.e if you dividend payment is only 20 dollars you wouldn’t want to pay a ten dollar fee to reinvest those dividends). Often times, larger companies offer dividend reinvestment programs (DRIPs) which you can find on companies websites, but the terms of the programs differ from company to company and most smaller companies do not offer such programs. There are also third party companies that offer DRIP programs, but these companies are often times hard to use and can have weird rules and hidden fees.
I’m sure at this point, given the title of this article, you have already guessed that one option to reinvest dividends with Ameritrade. Ameritrade offers free dividend reinvestments or a free DRIP program. It’s pretty simple too; despite the fact that Ameritrade barely advertises the program on their website. All you have to do is buy a stock with Ameritrade (a ten dollar commission) and call the company’s support line (800-669-3900, available 24 hours a day) and tell them which stocks you want to have the dividends reinvested. And poof, your dividends will be reinvested at no extra charge.
To check out Ameritrade, click here.
I called Scottrade and they told me they don’t offer any sort of dividend reinvestment program. Right now my online broker is Ameritrade, and I was considering switching to Scottrade for the cheaper commissions but with the free dividend reinvestments at Ameritrade I’m not going to switch.