Recently I discovered that Firstrade has a dividend reinvestment plan (DRIP) which I believe is beneficial to long-term investors.
What is a DRIP?
DRIP automatically converts the dividend into shares of the dividend-paying stock. By taking advantage of this plan, we can enjoy the benefits of compounding returns without having to place an order, pay a commission, or even purchase a round number of shares.
This plan is available to any dividend-paying stock or exchange traded fund (ETF) that is above $4 and supports fractional shares.
Firstrade dividend reinvestment plan
We can enroll either a single eligible stock or all eligible stocks in our portfolio.
What if the dividend received is less than the price of a share? We will receive fractional shares, meaning less than one share. The reinvested shares will be purchased at the market price on the dividend pay date.
How to set up DRIP?
Access the Dividend Reinvestment page by clicking on “Accounts -> Positions -> Dividend Reinvestment”. You can choose between one of two options: (Option 1: Enroll account in DRIP) will enable or remove dividend reinvestment on all securities in your account, (Option 2) allows you to specify a security that you would like to enable or remove from DRIP. Dividend Reinvestment Plan enrollment requests will take effect the following business day.
What happens if we want to sell the stock?
We would have to sell all shares and the fractional shares will be automatically sold by the settlement date.
Conclusion
I think this DRIP is a good way for us to accumulate the shares of our preferred stocks or ETFs. When the dividend is received, it will be converted to shares of the same stock or ETF. Although there will be fractional shares in our portfolio, they are still valid shares and will help to increase our wealth.
ToledoTrade has this function too but it seems like the commission will be charged for the purchase of shares with dividend (Link). I think it is not a cost-effective way, especially if the dividend received is too little. So, I will not recommend using it for DRIP if you do not received a large amount of dividends.
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