M1 Finance For Dividend Investing

By | March 26, 2018

As you may know, the stocks that make up my dividend portfolio are located separately at Computershare and Capital One Investing.  Later this year, E*trade will fully acquire Capital One Investing.  Therefore, even though I’m a Capital One Investing customer, when the transition happens, I will automatically be an E*trade customer.  Hopefully, the transition goes smoothly and there are no hiccups.  But, because of the acquisition, I have been reassessing my investing strategy and came across M1 Finance.  As I have not yet signed up with M1 Finance, this will not be a review of my experience with them.  I will do that in a later post, if I end up making the switch.  For now, I just want to explore in greater detail whether it makes sense for me to switch to this new brokerage firm or robo-adviser.

Capital One Investing

Capital One Investing started out as Sharebuilder Corporation back in 1996.  Then, in 2007, ING Direct acquired Sharebuilder.  5 years later in 2012, Capital One Financial Corporation acquired ING.  Finally, in January 2018, it was announced that E*trade will acquire Capital One Investing, which of course originally started out as Sharebuilder.  You can visit this Wikipedia page to learn more about the history of Capital One Investing.

One of the things that distinguished Capital One Investing from other brokers was that it allowed investors to automatically buy fractional shares of stock.  For example, let’s say an investor wants to purchase Apple and the stock was trading for $100 a share.  Other brokers required that you purchased whole shares.  So, the investor would have to come up with the full $100 before investing in Apple using other brokers.  With Capital One Investing, however, the investor could deposit $25 and get 0.25 shares of Apple.  So, Capital One Investing catered to the small investor.  It’s no coincidence that the tag line for the home page of Dividend Portfolio is “A Portfolio For The Small Investor.”  That’s what I was (and still am) when I got started and I wanted to find a brokerage firm that catered to me.

Moreover, Capital One Investing has automatic dividend reinvesting, which is very important for a dividend investor.



Advantage Plan

Although the pricing plan for Capital One Investing changed throughout the years, there is one plan that was of keen interest to me.  That was their Advantage Plan.  The idea was that if you paid $12 per month, you would get 12 trades for that price.  That’s the functional equivalent of paying $1 per trade.  You would then pay $1 extra per trade for any trade over 12 trades for the month.  As a small investor, this seemed ideal.  Other brokerage firms were charging as much as $9.99 per trade.  But who could argue with $1 per trade?

For whatever the reason, Capital One Investing discontinued their Advantage Plan for new members.  But, old customers, like myself, were grandfathered into the program.  Arguably, the fees are excessive if the invested amount is small.  But I was ok with paying the fees because it allowed me to get started and to keep on going.  Now the concern I have is whether or not E*trade will maintain the Advantage Plan for those who were previously grandfathered in.

Perhaps a downside of using the Advantage Plan is that, by investing the way I did, they would do only batch trades.  So, every Tuesday, Capital One Investing would make my purchase.  Because I had a full time job (still do), I didn’t mind this approach.  It’s definitely not for everyone, but I was ok with it.

Computershare

Computershare is a transfer agent that allows you to invest directly with the companies and avoid a brokerage firm.  The benefits include buying fractional shares of stock, automatic reinvesting of dividends, and sometimes low or even no fees.  It has been suggested by some financial advisers, including Ric Edelman who said as much on his radio show, that this is an outdated way to invest in the market.  I guess, to some extent, I don’t disagree.  However, I like this form of investing.  Everything is always new and changing, especially with technology.  It’s almost refreshing to know that I’m still doing things old school.

The thing I used to hate with transfer agents such as Computershare was that you had to maintain the records all by yourself.  So, doing taxes was a nightmare.  That’s part of the reason why I got out of DRIPs way before I started the Dividend Portfolio blog.  But thankfully, all I have to do now is upload my data into Turbo Tax and then I’m done.

Still, DRIPs used to be more cost efficient.  Coca Cola, for example, used to be free with Computershare.  Now, there is a fee to DRIP Coca Cola with Computershare.  There still are no fee DRIPs, including Emerson Electric, which is the most recent addition to my portfolio.  But, alternative forms of investing should strongly be considered as no fee DRIPs become more rare.

M1 Finance – The Better Alternative?

You’ve heard of Robinhood!  But, have you heard of M1 Finance?  Like Robinhood, M1 Finance is totally commission free.  But, unlike Robinhood, M1 Finance offers four important features for a dividend investor.  These are:

  • Automatic Investing
  • Fractional Shares
  • Automatic Dividend Reinvesting and
  • Dynamic Rebalancing.

1.  Automatic Investing

I’m a lazy investor.  I just want to be able to set up my accounts such that money automatically flows from my checking account directly into my brokerage account. Then, and this is the important part, once the money is in my brokerage account, I want those funds to be used to automatically purchase individual securities.  I know you can do these with index and mutual funds using traditional brokerages, and they can even be commission free.  But not many companies allow me to automatically purchase individual stocks.  Robinhood doesn’t, even though it allows me to schedule automatic transfers into the app itself.  M1 Finance does.

I don’t have the desire to have to manually make purchases every single month from cash that has piled up in my account.  As I said, I’m lazy.

2.  Fractional Shares

M1 Finance allows you to buy fractional shares.  I already gave an example above.  But this will allow me to concentrate on the dollar amount I use to invest and not so much on the number of shares.  All I have to worry about is adjusting over time the amount of money that comes from my checking account.  I do the work once, and that’s it.  Then, all of my money is working for me because I am able to purchase fractional shares.  I really like this form of investing.

3.  Automatic Dividend Reinvesting

Similar to the automatic investing, once I receive dividends, I want those dividends to be automatically reinvested.  Ideally, those dividends would be automatically reinvested in the same stock that paid the dividends.  M1 Finance does have automatic dividend reinvesting but it works a little bit differently, which is discussed below.  Also, for the dividends to be reinvested, they have to add up to at least $10 before they get reinvested.

Other traditional brokerage firms have automatic dividend reinvesting, which results in fractional shares, even though they require the purchase of whole shares with your contributions.  For the strategy I’m pursuing, it’s not ideal.  So, thankfully, there are alternatives like M1 Finance that are more ideal.

4.  Dynamic Rebalancing

This is very interesting to me.  M1 Finance has both manual and dynamic rebalancing.  As far as I understand, manual rebalancing operates the traditional way.  That is, to rebalance the portfolio, some securities are sold.  However, with dynamic rebalancing M1 Finance controls the cash flow that goes into the portfolio such that it gives less amount of money to those stocks that are over your target and more money to those stocks that are under your target.

I realize I’m not going into the full details about how M1 Finance works.  The gist of it is that part of establishing a portfolio, you set various targets for each individual security in your portfolio.  So, for example, if I have a portfolio of 20 stocks, I can weigh them evenly to say that each stock should represent 5% of my portfolio.  If I contribute $1000 a month to the portfolio, the $1000 will be dynamically divided among my 20 stocks in accordance with whatever target (eg. 5%) I’ve selected.  So, unlike Capital One Investing, for example, I could deposit $200 into Apple and $50 into Realty Income.  With M1 Finance, I deposit $250 but that money gets distributed dynamically by M1 Finance into my portfolio.

Dividends work the same way as well.  So, once dividends are received, and equal to at least $10, those dividends are automatically dynamically reinvested into my portfolio in accordance with my target allocation – not necessarily into the same stock that produced the dividends.

It’s a very interesting, and perhaps, more effective way to reinvest dividends.  But, I like the fact that dynamic rebalancing, which does not require the sale of the asset, is something that is free and available with M1 Finance, which I can hardly say for other brokers.



Conclusion

Let me know your thoughts.  I will likely use M1 Finance for at least two more additional stocks to my dividend portfolio in the near future.  However, I am seriously considering transferring the core of my holdings to M1 Finance irrespective of whether or not E*trade honors the same pricing options as Capital One Investing.  I would then use that $144 in fees towards building my dividend portfolio.

I’m a bit hesitant to make the switch because M1 Finance is a relatively new company.  It started in 2016 and so it doesn’t have the long track record of other brokerage firms.  Of course, we all have to start somewhere.  This very blog started in 2016 and I plan to be around for decades.  The reviews of M1 Finance are great and the firm seems to offer a great service for a great price (free).

So, what are your thoughts?  Do you think I should make the switch from Capital One Investing to M1 Finance?  Is their method of reinvesting dividends better than the traditional method? Regardless, I will be staying with Computershare, if nothing else to have diversity in brokerages and not have all my eggs in one basket.

Let me know your thoughts by commenting below.

18 thoughts on “M1 Finance For Dividend Investing

  1. Tom @ Dividends Diversify

    Hi DP, I can’t help much here. I started with Robinhood about 15 years ago, but moved on as my investment grew. A couple things to consider.
    1)Consolidation. As your investments grow you may like having them all at one place. Each account is federally insured against non market losses (eg fraud) up to $500k. Firms normally hold insurance to protect accounts for more. So, there is not much benefit to diversification.
    2)Transaction history. Will your history transfer to a new broker? If not, you will have to manually maintain it on the side. As your DRIP history grows, it’s nice if your broker has it all for tax purposes and your quick access.
    Tom
    Tom @ Dividends Diversify recently posted…Southern ComfortMy Profile

    Reply
    1. Dividend Portfolio Post author

      Good points Tom. At some point I need to maintain my investment history before the transition to E*trade just in case. I understand the point about consolidating. The way I do it now, my Roth IRA is with Vanguard. I have a separate Roth 401k at work, Computershare, and Capital One Investing. I have modest amounts with Robinhood and Acorns. Consolidation would be nice, but I don’t mind it. That’s actually one of the things I like about my portfolio page. Everything (related to my dividend portfolio) is tracked there. I also use Personal Capital to see my overall net worth. But I suppose it’s not a bad problem to have, especially when my account grows.

      Reply
  2. p2035

    Good for you DD. Im sitting on the safeside with my bank brocker account as an old guy but this is my nest egg and I would not like to have it in some unkowen staertup with heck know where the money going actualy. They can show that you are buying shares but you are not 100% sure if this is not actually a fraud 🙂 but my patients has its limits. with 30% “automatic” tax for us dividends and very limited options for us stocks (cannt buy O, D, OHI and many more) im more and more looking for other options 🙂
    p2035 recently posted…2018 Q1 DividendsMy Profile

    Reply
    1. Dividend Portfolio Post author

      It’s certainly wise to be cautious especially trusting a new company, but all the signs point to the fact that M1 Finance is not a fraudulent company and it seems my investments would be protected. But, no use switching if you don’t need to. If it’s not broken, don’t fix it.

      Reply
    1. Dividend Portfolio Post author

      I’m not looking forward to transitioning to a new company, but I’m hoping it goes smooth as well. Fractional shares are awesome. It’s sad that not a lot of companies offer them.

      Reply
  3. dividendgeek

    M1 looks good. I used to have an account with Loyal3. It offered free trades and fractional shares. Loyal3 is no more. I had a though time porting my stocks to scottrade. How does M1 make money? is their business model sustainable?
    dividendgeek recently posted…2018 Q1 / March Dividend ReportMy Profile

    Reply
    1. Dividend Portfolio Post author

      Geek, they make money by extending credit through margin to customers, getting paid to distribute certain funds or transact on various exchanges. It looks like this is where a majority of their revenue comes from already. Regarding whether or not it’s sustainable, I honestly don’t know. I looked at Loyal3 before and saw that it had closed down. I hate the idea of having to move brokerages and would find it annoying to move my funds to M1 Finance only having to move again in a few years. But, I do think there is a race to $0 in terms of commissions, and as soon as a traditional brokerage has most or all the features I like, I have no problems in moving assets to that brokerage. I just hope that M1 Finance is sustainable, and eventually gives us the ability to set the dollar amount we want to invest in any particular stock, which is something I’m going to miss if I use the firm.

      Reply
  4. Dividend Daze

    Never heard of M1 but it sounds great. Commission free trades always help. Mainly, I look for most of those things you listed. DRIP for sure which usually leads to fractional shares. I don’t really do a lot of automatic investing but I know you do. Reliability is key, make sure their platform stays up and has minimal down time. Also not a bad idea to see if the broker keeps track of cost basis. That can get tricky to calculate with DRIP and fractional shares. Throws off the yield numbers a little bit. Good luck in your decision.

    Reply
    1. Dividend Portfolio Post author

      Thanks. I just added two stocks to my portfolio and will Drip those stocks with M1 Finance to see how things go. I do believe they keep track of the cost basis, but will double check. Taxes are a huge deal for me, and so all I have to do is upload the data to turbo tax come tax time, but again, I’ll double check. I hope it works out.

      Reply
  5. Frankie @ Fully Franked Finance

    Sounds very interesting Div Portfolio, I’d be a bit torn personally. I prefer keeping things simple, and so prefer using a single broker. But in saying that, I also don’t like handing over the reigns of my investing to these automated investment platforms which do this automated rebalancing and other functions. I prefer to be fully in control of any transactions I make! Sounds like it could be worth using though if you like that functionality and the partial investing and dividend reinvesting.

    Reply
    1. Dividend Portfolio Post author

      I definitely like the functionality. I’m not necessarily a fan that I can’t specify x amount into any one particular stock and the money just gets allocated to the entire portfolio. I’m testing things out with two stocks, but may very well move my entire portfolio over to M1 Finance. Ordinarily I would have preferred to have everything under one brokerage but there is something reassuring about not having all my cash tied up with one brokerage firm.

      Reply
  6. Engineering Dividends

    Nice review, DP. I think the most interesting aspect might be the automatic investing into individual stocks… something I may research further to get more details on how it works.
    I used to have a few DRiPs with Computershare for many years, but I eventually transferred them out as I started building my dividend Portfolio. The convenience of having all the stocks in one account was so much nicer. I tended to focus on stocks with DRiPs that were no fee or low fee, but it limited my choices. Still, it was a good place to start.
    I look forward to hearing how M1 Finance is working out in a future post.
    Engineering Dividends recently posted…Monthly Dividend Income (Mar. 2018)My Profile

    Reply
    1. Dividend Portfolio Post author

      Thanks ED. I just hope their business is sustainable. The idea that you can automatically buy stocks using dollar cost averaging is indeed powerful. I may do an actual review of M1 Finance in the future.

      Reply
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  9. Travis

    Along with many others, I had never heard or seen ads of M1 until the beginning of this year due to Capital One. So, I have just set up a move to M1 from Capital One due to stopping fractional share purchase in the merging company Etrade. Fractional shares was and will continue to be my main way of purchasing stocks. There is no way I can afford 1 full GOOG share now or many others I have in my portfolio. This is totally a different culture language in terms of getting it set up in ‘pies’, lol. They say you can set up several pies but all except the 1st one shows ‘unused’. I have a large portfolio with large and small stocks that I’ve collected thru the years, starting with the original name of Sharebuilder and moving on with their mergers seamlessly because each company kept the sharebuilder feature.
    My biggest problem is getting my head around their idea of distributing dividends to ALL stocks in the pie. The way I see it is I worked hard purchasing certain stock(s) because they offered great dividends to help my stocks grow. Now those great stocks are having to ‘share’ its payout with everyone. Not happy with that. I’m also use to picking the stocks to purchasing the fractional shares and letting it ride for weeks and leave the others alone for a while.
    I realize change is constant. It’s just willing to get out of my comfort zone and face it head-on. I’m in learning mode right now so thank you for your blog. It was helpful.

    Reply
    1. Dividend Portfolio Post author

      Travis, I’m glad you found the blog helpful. I too am still trying to get used to the way M1 Finance does their investing. I prefer the old and traditional DRIP method where the dividends I receive gets purchased in the stock that generated the dividends. I’m also with Computershare and thank goodness, they maintain a traditional DRIP plan and so I get the satisfaction of seeing those DRIPs in action. With M1, the satisfaction is less so. I do think their approach has merit, but I just can’t help but prefer the old way. The good news is that M1 Finance continually makes changes and improvements and hopefully, one day, that will be a change they make. Technically, there is a way to get it DRIP traditionally, but that would involve setting up multiple accounts and I don’t believe in that sense that the juice would be worth the squeeze.

      Reply

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