Schwab purchase of TD Ameritrade

[silverflake]

So as some of you may know, Charles Schwab has purchased online brokerage TD Ameritrade. I want to tell you of a seemingly minor change that I discovered this week that's really irking me.

The deal goes through September of this year but already TD is working some Schwab policies in. I have used TD Ameritrade for me and my wifes Roths and IRAs for 20 years. I switched to Fidelity for a bit but found that they didn't allow me to do certain things and went back to TD and am happy with everything there.

OK so what's my problem? I own a company WRB (W.R. Berkley - insurance company). Have had it for years. Has had a fantastic return for me. It pays a regular quarterly dividend which I have set up to automatically re-invest. It's a very small divi but, regular and growing (slowly). All good. But the beauty of WRB is that based on their income and float etc. they end up paying SPECIAL DIVIDENDS throughout the year. I've had years where they paid 4 special dividends. This year they paid two. In TD Ameritrade, their special dividends also automatically re-invest. And these dividends are actually meaningful, sometimes they are 4 times the size of the regular dividend. Well, WRB paid me another special dividend last week. But as of today, it still hadn't re-invested and bought me any new shares. So I called TD Ameritrade. After being transferred twice, I ended up speaking to a corporate action specialist who told me that they are now working under Charles Schwab policies and Schwab does not re-invest special dividends. Pays them out in cash. I made a point to tell them that for folks who are not retired, the only way to compound stocks is through dividend re-investment. Of course she politely thanked me for my opinion but that's how things are done. This truly irks me!!!! I have 11 years to retirement. Without digging down and doing the math, my WRB investment is not going to compound fully for me! Is there anyone out there (Recyclersteve?) who can explain why a brokerage will reinvest regular dividends but not special dividends? It just doesn't make any sense to me.

Well there's my rant and my own warning to anyone else out there using TD Ameritrade (or Schwab) trying to compound their investments in insurance companies.

[thecrazyone]

Sorry to hear about that change. Although I know this was not what you were asking about, their stock is currently trading at $70/share, and although they might have special dividends, there are monthly dividend stocks out there that both cost less and pay better for the year. If I were you, I would consider selling some of that stock and trying out one like ARR.

[silverflake]

thecrazyone, I greatly appreciate the recommendation and while I realize one of the worst things we can do is "fall in love" with one of our stocks, I LOVE WRB. It's a property casualty Insurance company which is one way Buffet created his wealth. They (insurance companies) are a beautiful business model from an investor stand point because they are the opposite of a bank. A bank takes its resources (money) and lends it out at interest to us, waiting (and hoping) for us to pay it back. An insurance company gets paid up front in the form of policy premiums and then invests that while it waits (it's "float") and if you have to make a claim (which is rare and the cost is built into those premiums by skilled actuaries) then and only then does an insurance company have to pay out. I bought this in 2013 as recommendation from one of my Stansberry newsletters (sometimes Stansberry hits some home runs) and am up like 350%. Based on my cost basis, those piddly quarterly dividends are actually paying me close to 3% (not the stated 0.57%) and with special dividends - well, I think I will hold and address Schwab rather than sell a gem. I usually put stop orders in even on blue chip dividend paying stocks but in reading my newletters from Stansberry (who also usually recommends stop orders to protect from catastrophic losses) they had recommended a group of cream of the crop stocks for long term hold that they would consider removing stop orders from and this was one of them. I would have stopped out in 2020, but I didn't.

I will just be a "Karen" and complain to Schwab every so often about changing their policy, maybe threaten to transfer to another brokerage etc. rather than selling.

By the way I think one of Buffets first huge winning stocks was Geico. Not sexy by any means but can't argue with the return.

[Recyclersteve]

Silverflake, back when Schwab charged commission for trades it would have been a pain to reinvest your special divvys into additional WRB stock. Now you can buy the additional shares WITHOUT any commission. Of course you have to buy whole shares. But you can adjust for that over time by rounding down to the nearest whole number and then round up the next time, assuming you have the additional cash for the fractional share.

I know this isn’t a perfect system and in a taxable account your cost basis will be more complicated when tax time comes around.

Re: Warren Buffett- I saw him in person at the big annual meeting in downtown Omaha in May, 2017 and even snapped pics of his house near downtown- not even in a gated community! Charlie Munger and Bill Gates were also at the annual meeting. It was like going to Woodstock! Can’t remember if he mentioned WRB- nobody was allowed to record the event once indoors.

Another company which pays both regular and special divvys that I like is A-Mark Precious Metals (AMRK). I first talked about it on this site over 2 years ago. I still have it, but have traded it 21 times since 11/20- all profitable. Insiders own 24% of stock. Short sellers (betting it will go down) only have 2%. Stock has a low P/E ratio of just 6 and the company has been buying a number of others in the space. Earnings are scheduled for next Monday (Feb.6). I don’t know how someone could digest all that and not seriously consider an investment in AMRK.

[Lemon Thrower]

I think you are overthinking this.

Just because you bought WRB many years ago doesn't mean you have to or should reinvest the dividends.

If you want to reinvest, then just place a trade.

I think the bigger point is that you should look at each purchase independent from each other. Is WRB as compelling today as when you first bought it? If it rises 20% this year, after marking up the price 20% is it still as compelling?

From a tax perspective, the result is the same. You are being taxed on the cash dividends even if you reinvest.

[silverflake]

Lemon Thrower and Recyclersteve, thanks so much for the perspective. You both bring up some thoughtful and logical points. Lemon Thrower, yes, this company is still compelling and making some future share purchases in the amount of the special dividend (should it still throw off special dividends, which it should) basically is the same thing (except in the case of odd amounts, can't purchase partial shares). Sometimes I do over think things. The only thing that was bothering me is that I love compounding passively. If I now have to pay more attention and actively buy shares with the special dividends cash, then it takes out the "passive" compounding. Yes, I know, small potatoes and a bit of that "overthinking".

As usual, I thank the Realcent members for their input and opinions. You have helped me.

Keep stacking!