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Question about auto-dividend reinvestment


Guest eatliftinvestgolf
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Guest eatliftinvestgolf

This might seem super basic, but how does dividend reinvest setting through a broker, like Schwab, actually function for determining cost basis ? 

 

For example, WFC paid a dividend on Saturday, it shows up in cash in my account on Monday, and I still haven't seen any additional shares credited to my account or the cash taken away from my cash & cash equivalents account balance. I had dividend reinvestment turned on prior to all key dividend dates (ex-div, record date, declaration)

 

If the stock moves significantly between date of payment and date when reinvestment is processed, timing could have a very material impact on the cost basis of reinvested proceeds. Is the timing the same every time they process the reinvestment ?

 

Some thoughts I had about the ways it could work....  I don't know which of the following options they are implementing:

 

(1) Wells Fargo processes the purchase transaction on the open Monday on my behalf, then sends lot information to Schwab with a lag.

 

(2) Wells Fargo processes the purchase transaction through a one-day VWAP, or some other formula, then sends lot information to Schwab with a lag.

 

(3) Schwab does  the purchase only once the cash settles a few days after payment is received.

 

I tried to call Schwab a few times about this question, but I was told a different answer by each customer service rep.  They really have no clue how it works. Amazing to me that no one has asked about this before.

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This might seem super basic, but how does dividend reinvest setting through a broker, like Schwab, actually function for determining cost basis ? 

 

For example, WFC paid a dividend on Saturday, it shows up in cash in my account on Monday, and I still haven't seen any additional shares credited to my account or the cash taken away from my cash & cash equivalents account balance. I had dividend reinvestment turned on prior to all key dividend dates (ex-div, record date, declaration)

 

If the stock moves significantly between date of payment and date when reinvestment is processed, timing could have a very material impact on the cost basis of reinvested proceeds. Is the timing the same every time they process the reinvestment ?

 

Some thoughts I had about the ways it could work....  I don't know which of the following options they are implementing:

 

(1) Wells Fargo processes the purchase transaction on the open Monday on my behalf, then sends lot information to Schwab with a lag.

 

(2) Wells Fargo processes the purchase transaction through a one-day VWAP, or some other formula, then sends lot information to Schwab with a lag.

 

(3) Schwab does  the purchase only once the cash settles a few days after payment is received.

 

I tried to call Schwab a few times about this question, but I was told a different answer by each customer service rep.  They really have no clue how it works. Amazing to me that no one has asked about this before.

 

But why use it? it's less than 1% per quarter. May be better just buy manually or let the cash accumulate for a while and then buy?

Plus, it might be timed/front run by market makers/arb traders.

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Guest eatliftinvestgolf

You’re probably right.  But I would like to better understand the explicit trade off being made. There is a convenience factor  of having the service and the opportunity cost of not being continuously reinvested with low friction.

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Auto dividend reinvestment is a bad deal for you because the shares being purchased for you are usually being issued at the same time...it's a good deal for other shareholders tough.

 

It's a better option to purchase shares from the open market because no shares get issued.

 

Beerbaron

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I used to have DRIP programs in my accounts for companies offering them but no longer do because 1-I think/hope to do better with the timing of reinvestments and 2-of concerns that, with firms paying high dividends and having a high DRIP participation rate, dividends may be reinvested during a period of artificial and temporary increase in demand (slightly higher prices). In one specific situation, the DRIP option helped to transform a losing value trap proposition into a neutral result. It's basically a form of dollar-cost averaging.

 

The share issuer initiates the program and may outsource the administration to a transfer agent. Some issuers even offer a discount on the shares bought through the designated re-investment program. Look at the WFC prospectus:

https://shareowneronline.equiniti.com/PlanMaterial.aspx?Type=Dpp&Plan=NW01

 

For the cost basis, the broker statement should update the cost with the additional shares bought through the plan. You still have to pay the tax on the dividend though. :)

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Guest eatliftinvestgolf

Auto dividend reinvestment is a bad deal for you because the shares being purchased for you are usually being issued at the same time...it's a good deal for other shareholders tough.

 

It's a better option to purchase shares from the open market because no shares get issued.

 

Beerbaron

 

I don’t understand your comment. How does issuance impact the pricing?

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Guest eatliftinvestgolf

I used to have DRIP programs in my accounts for companies offering them but no longer do because 1-I think/hope to do better with the timing of reinvestments and 2-of concerns that, with firms paying high dividends and having a high DRIP participation rate, dividends may be reinvested during a period of artificial and temporary increase in demand (slightly higher prices). In one specific situation, the DRIP option helped to transform a losing value trap proposition into a neutral result. It's basically a form of dollar-cost averaging.

 

The share issuer initiates the program and may outsource the administration to a transfer agent. Some issuers even offer a discount on the shares bought through the designated re-investment program. Look at the WFC prospectus:

https://shareowneronline.equiniti.com/PlanMaterial.aspx?Type=Dpp&Plan=NW01

 

For the cost basis, the broker statement should update the cost with the additional shares bought through the plan. You still have to pay the tax on the dividend though. :)

 

Thanks, yes I had read this prospectus in my search for info but wasn’t clear if that applies when using a broker.

 

Yes, so now it has processed and shows a price of $45.30 with a transaction / settlement date of 6/4/19.  It looks like $45.30 was the price at the open yesterday, but Schwab was unable to explain the method used after I called again.  This time they said they had to apply an average to everyone who uses the service, even though the prior reps said they just wait to get the info from WFC.  They really just don’t know. 

 

This price was 2% higher than the prior day’s open, so the “cost” of enrolling in the program is quite real.    Using the cost of a commission divided by this price difference, you would only need to invest $248 or more of dividends to come out ahead by doing it yourself. 

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^I had similar concerns years ago. The answer I had obtained (if memory serves well) was that my broker was using a rolling 5-day weighted average price on the payment date. After following a few quarters, it seemed that the brokerage firm was applying a consistent method. If you have discipline, doing the buying yourself may save some broker-specific embedded fees of the "free" plans, especially for larger amounts. But discipline also has an implicit price.

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I used to have DRIP programs in my accounts for companies offering them but no longer do because 1-I think/hope to do better with the timing of reinvestments and 2-of concerns that, with firms paying high dividends and having a high DRIP participation rate, dividends may be reinvested during a period of artificial and temporary increase in demand (slightly higher prices). In one specific situation, the DRIP option helped to transform a losing value trap proposition into a neutral result. It's basically a form of dollar-cost averaging.

 

The share issuer initiates the program and may outsource the administration to a transfer agent. Some issuers even offer a discount on the shares bought through the designated re-investment program. Look at the WFC prospectus:

https://shareowneronline.equiniti.com/PlanMaterial.aspx?Type=Dpp&Plan=NW01

 

For the cost basis, the broker statement should update the cost with the additional shares bought through the plan. You still have to pay the tax on the dividend though. :)

 

Thanks, yes I had read this prospectus in my search for info but wasn’t clear if that applies when using a broker.

 

Yes, so now it has processed and shows a price of $45.30 with a transaction / settlement date of 6/4/19.  It looks like $45.30 was the price at the open yesterday, but Schwab was unable to explain the method used after I called again.  This time they said they had to apply an average to everyone who uses the service, even though the prior reps said they just wait to get the info from WFC.  They really just don’t know. 

 

This price was 2% higher than the prior day’s open, so the “cost” of enrolling in the program is quite real.    Using the cost of a commission divided by this price difference, you would only need to invest $248 or more of dividends to come out ahead by doing it yourself.

 

Don’t use Schwab. BoA’s Merrill Edge or Chase both give you a lot of  free trades and access to Merrill/JPM ‘s institutional research. BoA is also running a promotion to give you up to $600 if you transfer assets there. The only negative is BoA has sky high margin rate of 10%, but I rarely use it anyway.

 

 

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  • 2 weeks later...

Auto dividend reinvestment is a bad deal for you because the shares being purchased for you are usually being issued at the same time...it's a good deal for other shareholders tough.

 

It's a better option to purchase shares from the open market because no shares get issued.

 

Beerbaron

 

I don’t understand your comment. How does issuance impact the pricing?

 

Attached is a little scenario comparison to explain. Hope it clarifies the logic.

 

BeerBaron

DRIP_Scenarios.xlsx

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Thanks for clarifying!

 

I am with Schwab as well and I use a software called Sharesight, which tracks Dividend Reinvestment Plans (DRP). After going through the cost basis for the DRP in Schwab, I've noticed that they are pretty much higher than if I had purchased shares that day on the open market. Can anyone share why? Very tempted to just let the money accumulate in my brokerage account and buy on the open market instead. Although DRP is convenient, I feel like I've been ripped off.

 

Auto dividend reinvestment is a bad deal for you because the shares being purchased for you are usually being issued at the same time...it's a good deal for other shareholders tough.

 

It's a better option to purchase shares from the open market because no shares get issued.

 

Beerbaron

 

I don’t understand your comment. How does issuance impact the pricing?

 

Attached is a little scenario comparison to explain. Hope it clarifies the logic.

 

BeerBaron

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