Long time Simply Safe Dividend readers will know that we’re big fans of Dividend Reinvestment Plans (DRIPs).
That’s because anything that helps automate investing and keeps you focused on the long-term is great for helping you maximize the compounding power of successful dividend growth investing.
However, there is an even better option out there, for customers of Scottrade, that has the potential to improve your long-term total returns even more.
Find out why a Flexible Reinvestment Program (FRIP) may be a superior choice, but also what limitations it has.
What Is a Flexible Reinvestment Program (FRIP)?
Scottrade (the only discount broker to offer a FRIP) lets you use the power of automated, commission-free dividend reinvestment, but in a more focused and targeted manner.
Specifically, you can select most stocks or ETFs to divert the dividends into a shared pool. Then you can select up to five stocks or ETFs into which to reinvest those pooled dividends commission free.
Why is this a potentially better option than a traditional DRIP? The answer lies in the differences between these two types of programs.
FRIP vs. DRIP Comparison
As you can see below, there are several important differences between the DRIPs offered by most discount brokers and Scottrade’s FRIP.
By far the most important is the mechanics of the FRIP program compared to a standard DRIP.
For example, in a DRIP a stock’s, ETF’s, or mutual fund’s dividends will be automatically reinvested into additional shares or units of that same holding, via a market order on the pay date of the dividend. Note that optional dividends (when a company is bought out and offers to pay investors in shares or cash) and special dividends generally are not eligible for DRIP plans.
Most DRIPS also allow fractional shares, which means that if an investment’s dividend isn’t large enough to buy an entire share, you still benefit from having all of the income working for you and compounding your long-term wealth and income.
Scottrade’s FRIP on the other hand is a bit different, in ways that are both better and worse depending on your needs.
The program works by letting you select any eligible stock or ETF (mutual funds are not eligible) and the dividends from these investments are put into a non-interest bearing account.
You can then select up to five stocks or ETFs into which to reinvest these dividends, in whole shares (no fractional shares), in any percentage you wish. The selection of which five securities you reinvest the dividends can be changed at any time, either online or by calling a Scottrade office.
So, with the limitations of the FRIP plan, including: only five securities at once, no mutual fund eligibility, and no fractional shares, why is the FRIP potentially better than a DRIP?
Simply put, a DRIP plan is a great, automated way to dollar cost average, meaning add to a position each quarter, regardless of price. This is a powerful tool because it helps you keep a long-term focus on investing rather than fall into the trap of short-term speculating or market timing.
However, the downside to a DRIP is that this form of capital allocation, while better than market timing, isn’t optimal. For example, say you own shares of Caterpillar (CAT), which has strongly outperformed the S&P 500 over the last year.
The reason for this strong rally is the hope that the Trump administration’s promise of huge tax reform, and up to $1 trillion in new infrastructure spending will create a major demand boom for the company’s industrial machinery.
However, this is a somewhat speculative rally, not backed up by the company’s continued weak fundamentals (sales, earnings, and cash flow have been declining for years due to a global mining recession).
This means that shares of Caterpillar could be overvalued today, and thus if you DRIP its shares you are potentially buying at a poor margin of safety (i.e. discount to intrinsic value).
Instead, Scottrade’s FRIP allows you to channel all your dividends to your most undervalued names, and even lets you schedule when you will buy them on a monthly or quarterly basis.
This means that your dividend capital allocation can be optimized to maximize your long-term wealth and income compounding, creating potential for your portfolio’s value to increase more substantially over time.
Limitations of FRIP
FRIP’s flexibility also means it’s not for everyone.
For example, because you can’t buy fractional shares, to maximize the benefit of quarterly dividend reinvestment you will need to have a large enough portfolio that you’ll generate significant dividend income. Otherwise your dividends will sit in your FRIP pool until they have accumulated enough funds to buy full shares of your selected, undervalued stocks.
In addition, to fully take advantage of FRIP you will need to devote some time and effort into following your stocks, in order to know which are the most undervalued at any given time. That’s because the limit of just five securities that can be bought via the dividend reinvestment pool means that you have to be selective about where you reinvest your dividends.
Because most people have busy lives and many don’t have the interest in tracking companies frequently (on a quarterly basis), a DRIP plan’s “set it and forget it” approach can be an easier and less time-intensive approach to building your wealth and income.
Finally, because Scottrade is the only discount broker to offer a FRIP, keep in mind that if you want to go with this option, you’ll have to open an account with that broker. That means paying $7 per trade in commission in order to buy your securities.
While that’s not a high cost, it’s also not the lowest that you can find compared to other brokers (many that offer DRIPs) but charge as little as $4 per commission.
Other FRIP Details to Know
If FRIP sounds like a good fit for you then you’ll need to open an account, either regular taxable or an IRA, with Scottrade.
After funding your account through five options, including electronic transfer (ACH is free), electronic stock transfer from another broker, mailed check, wire transfer, or stock certificate deposit, you can set up your FRIP online or by phone with your nearest branch office.
Finally, be aware that, just as with DRIPs, your dividends may be exposed to foreign tax withholding (unless in an IRA) for shares in companies incorporated overseas. The amount withheld can vary between 10% and 35%, depending on the country.
In order to recover these withheld dividends you’ll need to file an IRS form 1040 to get a foreign tax credit, or the more complex and time consuming form 1116 (for which the instructions alone are 24 pages long) to fully recover the withheld payout.
In addition, just like DRIPs, FRIP dividends held in a taxable account will be liable for the same tax treatment as the underlying security. For most stocks, specifically those classified as regular corporations, these are qualified dividends, meaning taxed at the same rate as long-term capital gains (0%, 15%, or 20% depending on your marginal tax bracket).
Concluding Thoughts on FRIPs
While Scottrade’s FRIP may not be for everyone, if you have a relatively large portfolio and have the time and interest to follow your holdings rather closely, then its superior flexibility and ability to target where your dividends get reinvested could be a reasonable way to optimize your portfolio’s long-term income and wealth compounding power.
I use Merrill Edge which offers free transactions every month with minimum balance and ive been ‘fripping’ on my own for a few years now. Id guess there are other brokerages that offer something similar. I love being able to buy 1 or 2 shares of a stock each month instead of waiting until i have enough cash to make it worth the price of the transaction
Hey Brian, is there any way to backtest or check if FRIP has a higher % return historically vs DRIP. Wondering if it’s worth the effort to swap brokers.
I’ve been a Scottrade user for many years… they have competitive trading rates, their FRIP program is the best in the industry, and they have the best management team in the industry. Unfortunately, Rodger Riney, the founder and CEO contracted cancer and sold the business to TDAmeritrade. When the sale finalizes some time this year or next, only time will tell if they continue the FRIP program and become competitive with the new wave of $4.95 trades. People like Rodger Riney will be missed and I may be shopping for a new broker…. Steve O
Hi Brian, I’m really enjoying all your frequent posts. I can imagine it takes a load of time and effort but really makes the subscription worthwhile for your diversity of opinions and ideas. Keep up the good work, Cheers, Doug
I have a couple of Scottrade accounts, plus many with Fidelity and some with Vanguard. To me it’s just easier to DRIP. With Fidelity lowering their trading commission to $4.95, they are ultra-competitive. Fidelity has been a go to for me for many years; I’m sticking with it.
My Scottrade branch manager has tried to get me to switch from Fidelity to Scottrade with my IRA and ROTH accounts. I feel that Fidelity has more to offer with their platform. The new Active Trader stand-alone program is really cool.
Bottom line: Both Scottrade and Fidelity are good. I just prefer Fidelity.
I use both Scottrade and Vanguard Brokerage. I prefer Scottrade for research, and its current flat price per stock trade has been lowered from $7 to $6.95. At Vanguard, in their Vanguard Voager Select program (if you have over $500,000 in Vanguard funds & ETFs at some point although I now have < $135,00 in their funds and ETFs, much more in V. brokerages) my vanguard stock trades are $2.00 each.
I just received a letter from the IRS saying I owe $$ on 2015, apparently distributions on my FRIP in a ST account. I did not sell any stock in 2015. Are FRIP distributions not unrealized gains?
I was told today that TDA will be discontinuing the FRIP program. I have filed complaints with both companies and am encouraging others to do the same.
I joined ST for my local branches (which have been closed or downsized) and the FRIP program. If FRIP is gone, so am I.
I was told today that Scottrade accounts will be converting to TD Ameritrade account in Feb. I specifically asked the branch manager about the FRIP and he told me they will discontinue the FRIP and go with a DRIP. I expressed my disappointment and said to relay my thoughts to management. I also said I would probably explore other options.
I only found out about the loss of the FRIP benefit in a Wall Street Journal article. I don’t see that announcement anywhere else, and Scottrade didn’t notify me of this change.
It is very disappointing to lose the FRIP benefit; I thought the TD Ameritrade deal was supposed to “Together, TD Ameritrade and Scottrade are building an even better experience for you, with best-in-class tools, resources and platforms for you.” ? Removing FRIP is taking away a best-in-class tool.
Does anyone no of a good alternative now that Ameritrade will discontinue the FRIP program. I too am extremely upset with the way the merger went. I’ve been with Scottrade since 2004 and it looks like I will have to find a brokerage.
FRIP was the greatest investing tool this micro-investor (<$2500/year) had found. I also haven't found an active trading platform as intuitive or convenient as ST's. I'm with Fidelity for the commissions, but the Active Trader Pro is slow and gawky.
I, too, was a ScottTrade customer and am very disappointed that TDA does not have a FRIP program. I didn’t even know that ST was the only online trader that had that program. I loved using it. I had my own little system where I would buy 1 share of X this month, then 1 share of Y next month, then 1 share of Z and so on. I hate this DRIP thing. It completely takes away the control I had before with the FRIP.
Furthermore, TDA’s website seems badly designed. It’s harder for me to find what I’m looking for. ScottTrade’s site was a lot easier to navigate.
Agreed… I like the FRIP and if another online company offered it or something very comparable I would leave Ameritrade in a heartbeat.
My account has converted from ST to TD, what a disappointment! Lost FRIP program now have DRIP. What I have found out with TD is that dividends don’t get credited to account til they settle. With ST they were able to be allocated on the pay date. With TD it’s a nightmare trying to track my payments. When the dust settles I will be moving my account to another broker. I can do my own FRIP or DRIP account and get credited on the day they (dividends) pay. Might cost me $ 4.00 but I can’t deal with TD accounting. 5 dividends payed last Thursday and here it is Monday and they are nowhere to be found, doesn’t even tell me they are pending. Loved ST but TD is a big disappointment.