Covered calls provide a potential income opportunity from trading options, but they involve risk and might not be suitable for all investors.
Getting Flexible with Dividend Reinvestment
There are two ways to handle dividends generated by securities: save them or spend them. If you spend dividends, you’re essentially using them as income – a strategy that many retirees use. If you save them, you’re essentially trying to compound your investment returns. The common term for that is dividend reinvestment.
Scottrade® clients interested in reinvestment can access the commission-free Flexible Reinvestment Program, or FRIP, which allows you to reinvest dividends into eligible securities.
“FRIP is dividend reinvestment unlike any other,” said Joe Correnti, senior vice president of brokerage product at Scottrade. “We allow you to take dividends from one security and reinvest them commission-free into potentially thousands of other securities, which is unique to Scottrade. You can use FRIP to acquire shares in specific securities that fit your overall investing plan.”
How FRIP Works
FRIP allows you to pool dividends generated by most stocks, exchange-traded funds (ETFs) and other types of equities. You then select eligible* securities for automatic, commission-free reinvestment. Most stocks, ETFs, American Depositary Receipts, master limited partnerships and real estate investment trusts are eligible for purchase.
You can choose up to 5 securities at a time to reinvest your pooled dividends, and you can change that list any time.
After figuring out which securities you want to purchase, you have to decide what proportion of your dividends will go to each. In other words, you might want to allocate 50% of your FRIP pool to Company A, 25% to Company B and 25% to Company C. Then you select a recurring date (either monthly or quarterly) when you would like to make a purchase. Shares are purchased automatically on the date selected. You can also change the purchase date at any time.
Only whole share purchases can be made. If you don’t have enough money to buy at least 1 whole share in all of your selected securities, FRIP will hold off on making a purchase until you do have enough.
How FRIP Can Work for You
There are several tactics you can consider with FRIP.
- Asset allocation: If you follow an asset allocation strategy, you can use FRIP to buy securities to help you rebalance your portfolio.
- Core and satellite: If you want to augment your core holdings with a non-core security you think could outperform the market, you can purchase a specific security through FRIP – commission-free.
- Buy and hold: If you’re a long-term acquirer of a particular security – even one that doesn’t generate a dividend – you can use FRIP to regularly purchase more shares.
- Dollar-cost average: By purchasing securities on a regular basis, you effectively are buying more shares when prices are low, and fewer shares when prices are high, which can lower your average cost per share.
- Reinvest: You can reinvest back into the same security that generated the dividends. However, keep in mind that you cannot reinvest into more than 5 securities at a time.
A Few FRIP® Pointers
As you’re considering FRIP, there are few things to keep in mind.
- In general, the fewer securities you select for purchase, the more often FRIP will purchase shares.
- In general, selecting high-priced securities for purchases will delay your FRIP purchases because you will need more money in your FRIP account to make purchases.
- Any unused funds after FRIP trades are made will remain in your dividend pool for future purchase.
Do you utilize dividend reinvestment today?
Find out more about Scottrade’s Flexible Reinvestment Program
*Marginable equities are eligible with the Program Balance, as defined in the Flexible Reinvestment Program® Terms and conditions.
Dollar-cost averaging does not assure a profit and does not protect against loss in declining markets and, because investing by dollar cost averaging involves continuous investment in securities regardless of fluctuating prices, the investor should consider his or her financial ability to continue purchases through periods of both low and high price levels.
Select investments are commission free to those using Scottrade's online platforms. Other fees and charges may apply.
Investors should consider the investment objectives, charges, expense, and unique risk profile of an Exchange Traded Fund (ETF) carefully before investing. A prospectus contains this and other information about the ETF and should be obtained from the issuer. The prospectus should be read carefully before investing.
The information and content provided is for informational and/or educational purposes only. The information presented or discussed is not, and should not be considered, a recommendation or an offer of, or solicitation of an offer by, Scottrade or its affiliates to buy, sell or hold any security or other financial product, or an endorsement or affirmation of any specific investment strategy. You are fully responsible for your investment decisions. Your choice to engage in a particular investment or investment strategy should be based solely on your own research and evaluation of the risks involved, your financial circumstances, and your investment objectives. Scottrade, Inc. and its affiliates are not offering or providing, and will not offer or provide, any advice, opinion or recommendation of the suitability, value or profitability of any particular investment or investment strategy.
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