You don’t have to pay fees to reinvest your dividends
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Dear Mr. Berko:
I purchased 900 shares of Annaly Capital Management Inc. (NLY) at $17.20 when you recommended it last November. The yield is fantastic – 17.4 percent – and I already got a dividend, which, as you also recommended, I reinvested. I was really shocked when my broker told me they are going to charge me $3 every time my Annaly dividend is reinvested. When I questioned the charge, my broker said that it cost his firm that much each time a dividend is reinvested. That really makes me mad, because I gave that firm nearly $7,000 in commissions in 2009. Is this the norm in the industry? Also: How can a mortgage real estate investment trust (REIT) pay 17.4 percent when mortgages are 5 percent, and can you explain a “good till cancel” order?
K.K., Wilmington, N.C.
Dear K.K.:
Many brokerages charge a fee to reinvest dividends, and that really frosts me. Considering the commissions you paid, I’d tell the broker to cancel the $3 charge. If he won’t, then take your business to Charles Schwab. Schwab won’t charge you to reinvest those dividends, and their commission costs are about 10 percent of what the big boys charge.
Another way to avoid the cost of a dividend reinvestment program (DRP) is to request delivery of your NLY shares. When you receive the shares, ring or write Annaly and ask for a DRP form; sign it, return it to NLY and except for a 44-cent stamp, the reinvestment won’t cost you a pfennig or a penny.
Meanwhile, your broker is a bloody liar – the DRP plan is just a single one-time keystroke on a computer, an automated process like posting interest to your money market account.
Now, when you place a good till cancel (GTC) order, you are telling the broker that when NLY stock trades at $15, or whatever price you specify, you want the stock to be sold. So when NLY, which is now trading at $17.21, trades at $15, the stock is sold at the market price on the next trade. Your order will remain open until you cancel it or it’s executed.
I would also recommend that you add a DNR (do not reduce) to the order. In all cases when a stock pays a dividend, the GTC order price is reduced by the amount of the dividend unless noted otherwise by a DNR.
NLY and other mortgage REITs earn huge returns because they use leverage, lots of leverage. Here’s how it works: Assume that Monster Mortgage has $1 million in cash and uses that money to purchase $1 million worth of mortgages with a 5 percent current return. That purchase will pay Monster $50,000 a year in interest.
Next, Monster Mortgage will pledge that $1 million in mortgages as collateral with its bank and purchase $8 million of new mortgages yielding 5 percent. The short-term borrowing costs on the $8 million will be 3 percent, so the $8 million new mortgage purchase nets Monster (5 percent less 3 percent) 2 percent. Monster earns $50,000 on the first million, then $160,000 on the $8 million purchase, which totals $210,000 on a $9 million investment, or 23 percent. So after Monster Mortgage pays its officers, its office costs, mailing and other expenses, the remainder is paid to shareholders.
Please address your financial questions to Malcolm Berko, P.O. Box 1416, Boca Raton, Fla. 33429 or e-mail him at malber@adelphia.net. © Copley News Service
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