From time to time companies ran offers free trades when opening new accounts. Recently Charles Schwab sparked a new trend by cutting their stock trade commission to $0. The other large brokerage companies jumped on the trend.
Dropping the trade commission from $10 to around $5 felt like a big deal at the time. Will $0 commissions be even bigger?
What’s interesting is in the early 2000s Charles Schwab decided to focus on higher net worth accounts by increasing the account minimum requirements to avoid account fees. They were the first brokerage company I used and transferred my small account away as a result of their strategy change.
While Charles Schwab started this round of commission fee changes, I only noticed it when Ally announced their commission cut to $0. For a moment I started thinking about opening an Ally account once I finish off building my 6 month emergency fund. Now I may not need to given the other companies have followed the trend.
In seeing the $0 trade commission availability I started to think about my dividend strategy and how it might change.
One quick note to I should mention. I’m not a financial planning professional. I’m sharing what’s working for me as part of my investing strategy. Always do your own research and consider your own circumstances before making any financial decisions. You could also check with your favorite financial professional to understand what would be best for your situation.
Will $0 commission stock trading affect dividend investing strategies?
Each investor will need to decide if they want to change their dividend strategies. Even small $5 trade commission still created a moment of pause to decide if the trade was worth the cost when you’re working with smaller amounts of money or few shares.
At $0 some of the barriers are removed while others remain. Let’s take a look at a few considerations.
You may be able to buy one more share
A commission, no matter how small, takes away from the amount of cash you actually have to spend on shares. Depending on how close you are from having enough money to buy the next share, a commission might make the gap larger.
When you’re a dividend investor, each additional share is important to help you snowball your account over time.
You may be able to buy shares sooner
As part of deciding if a stock purchase is worth the commission, you may calculate how much a share’s price needs to increase to cover the cost.
With the commission reduced to $0 there is no longer a cost to cover. And even with a few pennies of activity assessment fees to cover a share sale (from $0.01 to $0.03 per $1,000 of principal), buying additional shares will feel easier.
You might sell a little sooner because get to keep more of the profit
If you have a few shares to sell even a $5 commission feels large when distributed to each share.
Or if the value of what you’re trying to sell is equally small, $5 would take a noticeable percentage out of your profit.
I have a few shares I have waffled on selling partially because they’re “expensive”. It’s taken a while and they’re just about to break even. If I no longer need to account for a sell commission (beyond a few fee pennies), I’ll finally be able to decide if I’m actually ready to sell.
You may need to pay a little more taxes on your profits
In non-retirement accounts, you’ll probably need to pay income tax on any profits you make from selling shares. The trade commissions reduced your profit.
$5 probably didn’t a large difference in your profit, but if you’re more inclined to sell sooner, you may have more paperwork each tax year.
You may want to think twice before churning your own shares in taxable accounts.
You still need to buy whole shares
At regular brokerage companies, you need to buy whole shares. With dividend reinvestment, they’ll automatically convert your dividend payment into partial and whole shares as needed.
If you decide to take your dividend payment in cash, it may take longer to compound your holding into more shares. Even with that partial shares, you get a slight increase in dividends each quarter or payment.
And you need to remember to purchase the additional shares once you have enough cash available.
Though tidy tax lots would make our accounts look cleaner.
How I might change my dividend investing strategy
My dividend investment strategy focused on buy-and-hold until circumstances change and use automatic dividend reinvestment to grow my account. And I’m planning to continue on that path.
With the cut in commissions, I’ll probably invest sooner since there is no commission to increase the cost per share to reach a profit sooner.
And for some “expensive shares” I waffle on selling, I might finally decide to sell some of them.
Wrapping up. Will $0 commission trading change your dividend investing strategy?
The idea behind going to $0 commissions will allow more people to enter the market that were previously kept out.
$0 commissions have the potential to change dividend reinvestment strategies. Maybe you’ll take your dividends in cash rather than letting it automatically DRIP (dividend reinvestment program).
While $5 didn’t feel like a lot of money, if you’re only able to invest a smaller amount of money, $5 spread across a few shares means it would take longer to recover the cost.
For larger valued holdings, if $5 wasn’t low enough to make you jump in and out of the shares, I suspect $0 won’t have as huge of an impact if you’re a buy-and-hold investor. If you’re going to churn your own shares in a taxable account, you’re just creating more paperwork for yourself in the next tax year.
Have you started to think about how your strategies will change? Or will you keep with the same strategies you’ve been following?
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