The Best Broker for Dividend Investors: Interactive Brokers Group, Inc. (NASDAQ:IBKR)
For the first three to four years of my transformation into dividend growth investing, I managed to develop a process of identifying attractive companies with prospects for further increases in passive dividend income. I managed to pay very little in commissions, since I was using brokers such as Zecco, which offered approximately 10 free trades every month. Since then, I kept adding money to other brokers, but was not able to find another company which offered low costs for me. This resulted in limitation on number of companies I can invest in every single month, despite the fact that I usually had more than 15-20 ideas at all times. I felt limited in the number of companies I can purchase every month, given that most brokers:
1) charge somewhere between $5 and $10 per online trade these days,
2) the fact that I do not want to pay more than 0.50% in commission costs per each transaction, and
3) the fact that I have a limit on the amount of funds I can contribute each month,
[drizzle]I believe that looking for great investments is important, but so is keeping costs to the minimum. Dividend investing is a business, and as the business owner my job is to keep expenses to the bone.
Back in 2014, I finally managed to find the broker that is right for me, and charges me as little as $0.35 per stock transaction. The broker is Interactive Brokers. It is SIPC insured up to $500,000, and as an added bonus is publicly traded, which makes it easy to monitor its financials and ensure I have entrusted my money with a reputable organization. In addition, investor accounts are further insured up to $30 million dollars with certain underwrites at Lloyds of London.
This broker is geared more towards experienced investors, and not new investors. Some investors might find the platform to be counter-intuitive, and difficult to navigate. If you need hand-holding, Interactive Brokers is not for you. If you would rather pay a $5 – $10 commission per investment, rather the low cost of Interactive Brokers, then you are going to cost your future self tens of thousands of dollars in potential excess expenses. Even small sums accumulate to large amounts given enough time and compounding.
My review will focus only on investing in US stocks using Interactive Brokers (IB). However, they also offer direct investing in European, Asian, American and Australian markets at pretty low and competitive commissions. In addition, you can invest in futures, commodities, currencies, bonds, and options using their platform. I believe that most dividend investors mostly invest in stocks, while a small minority invest in options or bonds. Interactive Brokers also offers IRA accounts. I am also not going to discuss that Interactive Brokers has the lowest margin rates available for retail investors. For someone with at least $100,000 in assets, the margin interest charged is 1.41% per year. The other brokers easily charge an interest rate of 6% – 8%/year for using margin.
To open an account, you need $10,000. For some, this could be an obstacle. However, if you are under the age of 25, you can open an account with as little as $3,000. You can fund the account with cash or securities from your other broker. I moved some of my securities from an existing account at Tradeking to Interactive Brokers. Vanguard and Fidelity do not charge a partial ACAT fee when you transfer some of your securities to another broker.
Opening an account includes the usual requirements such as Social Security Number, Address, Bank Account Information etc. The nice thing is that Interactive Brokers is also open for Non-US citizens. So if you are reading this site from Canada or UK or Germany for example, Interactive Brokers could be a good option that could dramatically lower your investment costs.
After you open the account, IB sends you a security card. It includes some security combinations, which need to be entered when you login to your account. Interactive Brokers takes security very seriously, and the random combinations on this security card are a prime example of it. When you withdraw or add cash to your brokerage account, they require further authentication and additional authentication using the security codes.
Interactive Brokers allows investors to access the trading platform using several interfaces. You can test drive the different platforms under this link.
You can use the TWS platform, which is really powerful and requires a software download. If you make investments from your home computer, you might be able to utilize the full scope of the software platform.
There is also a way to access the brokerage from the web. This platform is called Webtrader. I utilize this most often, because I spend the time when the stock market is open at the office.
A third way to access the platform is using a mobile application. I have utilized this a few times, and was satisfied with the platform. This is a nice way to make an investment, or monitor portfolio holdings, if one is on the go.
The nice thing about Interactive Brokers is that my orders are routed directly to Electronic Exchanges in real-time and receive the best price available at the moment. I think that getting the best prices is very important, because a broker that does not provide that, might be costing you a lot of money. I used to purchase shares using Sharebuilder’s weekly investments or Loyal 3, and from my experience I can tell you that the prices at which my orders have been executed did not seem very good. While a few cents/share might not seem like much, it all adds up over time.
There are two types of commission structures for Interactive Brokers. The first is fixed, where you pay half a cent per share, with a minimum amount of $1/trade. This means that if you purchase anywhere from 1 share to 200 shares, you will pay $1. This is not an issue for most investors, since few of those I have talked to spend more than $1,000 –$ 2,000 per individual investment. If you are a high roller, you can buy 300 shares of Johnson & Johnson (JNJ) for $30,000 and pay $1.50 for this transaction. Fixed pricing for stocks, ETFs and warrants charges a fixed amount per share or a set percent of trade value, and includes all IB commissions, exchange and most regulatory fees with the exception of the transaction fees, which are passed through on all stock sales.
The second commission type is tiered. Tiered pricing for stocks, ETFs and warrants includes low broker commission, which decreases depending on volume, plus exchange, regulatory, and clearing fees. In cases where an exchange provides a rebate, Interactive Brokers passed some or all of the savings directly back to you. For those do it yourself dividend investors like myself and others, the minimum commission is $0.35/trade. Other than that, the cost is 0.35 cents/share. This means if you invest in 100 shares, you will pay a 35 cent commission. If you buy 200 shares, you will pay a mind-boggling 70 cent commission.
While there are exchange fees, these are negligible in my experience