Thursday 29 December 2011

Interactive Brokers - No DRP

I have now been using interactive brokers for ~2 months and while I am getting much more familiar with the way the trading system operates I discovered the first major disadvantage with the discount broker - you cannot participate in DRPs.

While this is rather minor for a short term trader (the type of investor IB is targetting) it definetely impacts the investment decision for a long term holder / believer in the stock (i.e. one who is looking to add to their position) and this is effect is further compounded where the DRP shares are issued at a discount to closing.

For example if the DRP discount is 1.5% and dividends are paid half yearly, the investor who cannot participate in the dividend is being diluted by 1.5% * (the proportion of investors that take up the dividend - typically ~30%)*(annual dividend) annually. Typically discounts on DRPs are availble for stable, high dividend paying stocks so if I assume a Dividend Yield of 6% (achievable on all ASX Bank stocks, property trusts and most utiltities) this results in an annual dilution of: 1.5% * 6.0% * 30% = 0.027% p.a.

This may not seem like a big amount over any period of time however the big issue isnt so much the discount as is the ability to add to your position for free (as DRPs typically incur no trading costs) and this is where the big saving is.

I currently have one high yielding property trust which I bought through interactive brokers which has a DRP plan with an associated discount that I cannot participate in. This does not worry me that much as it is a relatively short term trade. I am looking to buy some bank stocks in the near future however which look to be good long term trades and in this case I may buy it through my old (higher cost) broker in order to get access to the DRP.

2 comments:

  1. I'm slowly going through your blog from the first post (so you probably deal with this one in a later post, but is it due to a custody arrangement?

    It's worthwhile checking this out due to the Opes Prime issue a few years back and how they treated the ownership of stock held on their HINs.

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    Replies
    1. Hi Streetikonz - yes it is...they hold your shares as a custodian (I did a post on the pros and cons of it here: http://90million.blogspot.com.au/2012/10/does-it-matter-if-my-broker-holds-title.html)

      This, however should not prevent them from offering DRPs as they offer participation in other pro-rata corporate actions such as share purchase plans and other capital raisings. I just think their system is not set up for DRPs.

      There are several issues (and some benefits) that come with having a custodian hold your shares. The Opes Prime example is one of the issues I discuss in the post above.

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