Advanced Tactics with the Flexible Reinvestment Program™
Scottrade's Flexible Reinvestment Program™ (FRIP™) offers you a commission-free way to reinvest dividends from most dividend-paying stocks or exchange-traded funds that you own into any other eligible* stock or ETF. FRIP™ can be used in multiple ways to reinvest dividends. A typical brokerage dividend reinvestment program (DRIP) only allows dividends to be reinvested back into the security that generated them.
FRIP™ can be used as a set-it-and-forget option to reinvest funds back into your existing dividend paying securities. Or it can be used in conjunction with several investment strategies. You should consult with a tax advisor about any tax implications.
Utilizing Set It and Forget It Tactics
Reinvestment back into a security:
You can reinvest dividends back into the securities. You are limited, however, to reinvesting in no more than five eligible securities at a time. Let's say you own $10,000 of stock in Company A, $6,000 in Company B and $4,000 in Company C. All pay dividends, and you want dividends to be reinvested back into those securities in roughly the same proportion you're holding them today. You could allocate 50 percent of your dividends to be reinvested into Company A, 30 percent into Company B and 20 percent into Company C.
Dollar-cost-average into a single security:
Dollar-cost-averaging essentially means you invest a similar amount of funds on a regular basis into a security. The basis of this approach is to buy fewer shares of a security when prices are high, and more shares when prices are low. You can use your FRIP™ dividend pool to dollar-cost-average by allocating 100 percent of your funds into a single security on a monthly or quarterly basis.
Minimal Portfolio Maintenance
Many investors rebalance their portfolios periodically so they can maintain a relatively constant allocation level in asset classes and sectors.You can use FRIP™ to at least partially rebalance your portfolio, commission-free. For example, let's say you want to increase your exposure to real estate. You could allocate 100 percent of your FRIP™ dividend pool to a real estate investment trust (REIT).
Core and satellite strategy:
Many investors have core holdings that make up the bulk of their portfolios. But they also allocate a small portion to certain industries, sectors, countries or individual securities that they think will outperform the markets. You could allocate FRIP™ funds toward securities that you identify as suitable satellites.
Put Reinvestments on Hold While You Research:
While Scottrade's flexible dividend reinvestment program is designed to be an automated system, you can effectively postpone trades from taking place so that you can build up cash in your FRIP™ dividend pool. You might do that for the following reasons:
- You want to take larger positions in one or more securities. Or
- If you're unsure of where to reinvest your FRIP™ funds, and want to wait until you've done more investment research.
You cannot stop the flexible reinvestment program from executing trades, but you can delay FRIP™ orders in two ways:
- Change the date for FRIP™ orders to the farthest allowed date, six months in the future. For example, on March 15, 2013, you could set the next trade to occur on Sept. 15, 2013. You can periodically push out that date if you need more time.
- Alternatively, you can set up an allocation system that would make it unlikely a trade would ever occur until you change it. For example:
99 to 1 Percent Reinvestment Strategy
Let's say you allocate 99 percent of your FRIP™ pool to one security and 1 percent to a second high-priced security trading at $1,000 per share. No FRIP™ orders can go through until you have enough funds in the FRIP™ dividend pool to buy at least one share of that stock, while keeping the 1 percent ratio. In this example, you would need more than $100,000 in your FRIP™ dividend pool for an order to be placed.
Use FRIP™ to Buy Commission Free Immediately
Because you can change your reinvestment dates at any time, you can effectively buy eligible securities whenever you have funds in your FRIP™ pool. To do this, follow the date technique or the 99 percent, 1 percent illustration outlined above. As soon as funds flow into your dividend pool, you change your reinvestment date to the following day, and then you change your reinvestment securities to any security or combination of up to five eligible securities that would allow trades to be completed. Once the trade is completed, you could return to the reinvest-on-date technique or the 99 percent, 1 percent reinvestment allocation technique.
*Marginable equities are eligible with the Program Balance, as defined in the Flexible Reinvestment Program™ Terms and Conditions.
REITs involve risks and are subject to market volatility. Please research each investment carefully.