Portfolio rebalance for the new 2021 year

The 2020 year turned the world on its head and this means a portfolio rebalance is in order. It is the time to cut under-performing holdings ready for 2021.

Novel Coronavirus (COVID-19) had a major impact on the world in 2020, many of which will change the way we live and work forever.

Unfortunately my time was limited and the blog got ignored for many months. Work and family commitments come well before the Den of Dividends during the Rony-Rona. So in this post we will catch up for around 9 months worth of trades.

This post will cover my additional buys as well as my portfolio rebalance at the end of the year.

March correction

After my early March purchases covered in the last posting, I paused for a couple of weeks and then continued to purchase at far cheaper prices. Additional shares in Carnival Corporation (CCL) helped bring down my rather costly initial position where I am actually in the green on them today.

Vermilion Energy (VET) is in the red for 2020, but I believe can see profit in 2021.

I took advantage of an additional deep buy of Vermilion Energy (VET), one of my favourite dividend stocks at the time in late March. I had been buying them for some time however the negative oil prices and the high amount of debt they carry then cratered the share price. With the share price well below $3.00, I trebled my position for less than my existing investment.

The close of 2020 still sees me down significantly on VET and no dividend. The former CEO has been booted out the door and the founders have returned to right the ship. With rising oil prices expected in 2021 I believe I will be in the green later in the year.

I also took opportunity to purchases AT&T (T), Simon Property (SPG), The Interpublic Group (IPG) and Energy Transfer (ET). All of these were average down positions during the drop in the market.

April spinoffs

April brought corporate changes in my United Technologies (formerly UTX) holding as they spun off Carrier (CARR) and Otis (OTIS), and merged with Raytheon to form Raytheon Technologies (RTX).

I took the opportunity to buy a few extra Carrier and Otis shares after relisting under their own identities. Both of these stocks have done very well, especially Carrier. I am now up well over 130% on my CARR holdings. Both stocks now look very expensive and have significant debt which UTX kindly gave them in the divorce proceedings.

I have yet to purchase additional RTX shares since the UTX/RTN merger. It feels like I have missed the boat on that where it was trading below $60. The Dividend CAGR is currently negative so while I am happy to hold, I do not think I will be purchasing any more unless shares drop significantly.

Spirit Realty Capital (SRC) started as a new position in April, where I picked up a small tranche. This REIT was well undervalued at the time and has provided some needed capital growth on a new position. The fact it is doing well in rent collections and still has a starting yield of over 6% makes SRC my preferred Retail REIT. It is fairly priced below $40.

May Madness

I again purchased Simon Property in May under $58 per share to average down my position. With the lockdowns in many US Markets and a horribly timed merger with Taubman Centers (formerly TCO) put on hold, the unrealized loss was over 60%. The only thing you can do when a stock is on sale is to buy more. I am still well down on Simon however it is a quality comany with great assets. I will continue buying SPG to average down.

Building positions June and July

During the ‘summer market’ period, I really started to accumulate into Spirit Realty (SRC). A low $30’s price and a 6.5% starting dividend yield, while collecting a high percentage of their rents, it has been a great performer. SRC is also a rare company that pays dividends in January, so I like how that fills in that income hole.

Spirit realty Capital owns a diverse portfolio of single tenant, triple net lease properties including Restaurants, Service Stations, big-box retail and office space. (Image source: SRC)

SRC has a much lower exposure to Movie Theatres in its property portfolio, something that Realty Income (O) is now struggling with. AMC has been doing very badly this year due to lockdowns while AT&T (T) and Disney (DIS) have taken advantage with their streaming platforms and released movies to streaming. This cuts out theatrical releases and in the current state of the world this is a good thing.

I have never personally been much of a ‘go to the movies’ guy, although it is nice now and again. Movie theatres struggling and streaming is starting to take its place. Streaming is now the growing distribution channel at the expense of theatres. While theatres are not going away, their capacity or numbers will need to fall due to lower demand. I do not believe the public will go as often as they did before 2020.

November brings Viatris

With a small holding of Pfizer (PFE), I ended up with a new holding of Viatris (VTRS) in November. Pfizer decided to spin out their Upjohn generic drug division and merge it with Mylan. Unfortunately the share consolidation left me with less than 1 share , so I purchased a few more.

VTRS has done pretty well, with an 11% gain in 2 months and mostly in the last few days of the year. I do not see this going anywhere much higher yet due to the amount of debt that the new company carries, with only about $10b in cash from Mylan’s balance sheet. The Q4 results will be interesting to watch.

December purchases and portfolio rebalance

More purchases in December for SRC, as I again started to look forward to the January dividend payment. I only have a few stocks that pay in January like Altria (MO), Pepsi (PEP), Cisco (CSCO) and Cyrus One (CONE).

I also took a look at a number of small positions in December which I decided top cut loose and invest the proceeds in more core holdings. So just prior to Christmas I said goodbye to a few stocks.

SELL: Prospect Capital (PSEC)

I decided to cut Prospect Capital loose at a slight profit and some decent dividends. The current low-interest environment does not suit their business model at all. There has also been some significant dilution of shareholders due to new issuance of shares. I may come back to them in the future, and probably with preference shares rather than the common stock.

SELL: Realty Income (O)

As a very small and non-core position, it was time to cut Realty Income too. Their ongoing lower rent collections and yield than peers, exposure to AMC and other theatre operations, and an under-performing share price all led to my decision on this. I took a 5% loss however this was less than a $500 position so no major issues.

SELL: Macquarie Infrastructure (MIC)

Macquarie Infrastructure shares did lose value after the dividend was suspended early in the year. I did get a 10% starting yield for reinvestment, but after the dividend cut there was little reason to stay. Once the share price spiked in late December and got me close to by cost average, I got out.

SELL: Brookfield Infrastructure Corp (BIPC)

I received free shares of BIPC from the BIP split in March. BIPC carries a premium due to the demand for C-Corp shares over Partnership Units. The time arrived to cash this small position in and reinvest somewhere else. I still hold BIP and will likely keep adding to it in the hope that I will be able to convert BIP to BIPC, and profit from that premium.


Proceeds of the above stocks are redeployed into Mastercard, Bank of America, AT & T, and Spirit Realty Capital.

Mastercard and Bank of America are two positions with excellent longterm CAGRs and should provide substantial growth in the long term from reinvestment. Neither position is at a size I am happy with, and Mastercard is quite low yield. There will be many more years of building that position, and the share price continues to rise over time.

AT&T and Spirit Realty are both current yield buys, returning 7.2% and 6.5% respectively. Some people are concerned over AT&T’s dividend coverage, I have no such concerns. I believe the growth from HBO Max streaming and a reopening economy in the middle of 2021 should help them pay down debt even faster.

And so ends 2020

The US Portfolio achieved 4.91% capital return, and 5.56% dividend yield for the year. I am very pleased with this result after quite a few dividend cuts. It could have been significantly better with some better capital allocation and smarter buying, however these are learning experiences.

2021 will see some more changes to the portfolio, including new positions and a few growth stocks. While dividend investing is my main thing, we should also not be blind to capital growth opportunities also.

The author is long on the following US-listed stocks at the time of publication: CCL, VET, T, SPG, IPG, ET, CARR, OTIS, RTX, SRC, PFE, VTRS, MO, PEP, CSCO, CONE, BIP, MA, BAC.
The author has no position on other stocks mentioned, including no short positions.

Stake Unlimited for free: have a poortfolio total of USD$5K in the platform before March 11.

Get Stake Unlimited for free

‘Founding Members’ save subscription fee with catch

An announcement this week from Stake has given the Unlimited Pack free for life to any Stake customer with a total USD$5K in the platform before March 11. This required value can contain any combination of stock holdings or cash balance in your US Wallet. It does not include any cash in your Macquarie CMA connected to Stake.

While this is a welcome announcement for many investors, some smaller account holders may feel a little left out. In AUD terms this comes out to approximately $7,700 which may be to high for some to reach within a few weeks. Not having to pay for the additional features coming to Stake will be seen as a big win for many. Stake has advised us that a large number of Stake customers are already qualified to receive the ‘founding member’ perk.

Den of Dividends has been in discussions with Stake for some time regarding the proposed change of funding model. While we have suggested some additional ‘perks’ for long time customers, the change announced this week exceeds anything we put forward. Our suggestions mostly looked for access to additional functions or higher limits to any limited functions before additional costs were incurred. To be clear, we had never discussed Stake Unlimited for free to founding customers.


Recently we announced some enhancements to Brokerage Packs. Today, we’re announcing a plan to further acknowledge and reward our existing customers – our founding community – in the transition toward this new model.

By 9am on Wednesday 11th March, 2020 all Stake customers who have US$5k or more in their Stake account will receive lifetime access to Stake Unlimited.

That’s right. With a value of US$5k (cash and stocks) and above in your account, you’ll be migrated to the US$9/month Stake Unlimited pack free of charge for life.

Will I get access to new features added into Stake Unlimited over time?
Absolutely. If you have US$5k or more in your Stake account by the date above, you’ll get all ongoing additions and enhancements as we release them.

What happens if I want to be on Stake Black?
You can. However, this offer extends only to Stake Unlimited, so to access Stake Black you’ll need to pay the monthly fee (after July 1, 2020).

Can I try Stake Black and then move back to my Stake Unlimited access?
Yes. If you’ve taken up the above offer, you can get back onto Stake Unlimited, free of charge, even if you’ve tried Stake Black for a period of time.

What happens if my account drops below US$5k after March 11th?
Nothing. If you have an account value of US$5k or more (cash and stocks) as at 9am on Wednesday 11th March, 2020 you will receive this offer. Once you’ve received this offer, your account balance can change as per normal.

What happens if I have that money in my Macquarie Cash Account?
Only money that is in your Stake USD wallet by the above time and date will count toward the US$5k threshold.

What happens if I already have an account value of US$5k?
You’re in! Just ensure that your account value stays at this level or above until the above time and date and you’ll receive this offer.

We’re excited to be able to reward our community that has been with us from the beginning in this way and we’ll be reminding you on email over the next two weeks to be sure you take advantage.

Click here to read more detail on the Brokerage Packs. Or, if you have any more questions about the above, don’t hesitate to get in touch.

The good …

It is pleasing to the Den of Dividends team that the outcome of Stake Unlimited for free is happening. The original announcement for the new subscription model was badly handled. This should bring most customers onto a ‘better than before’ status.

Additional features that are coming such as the advanced order types like Good til Cancelled (GTC) are helpful. The addition of automated DRP and options trading will make the platform even better.

… the bad

Only investors with the required $5K in holdings/cash on the US-side of the platform will get this benefit. There may be some long-term investors through Stake who have not been able to grow their portfolio to that size. Other customers may have been hit in the global market correction this week, and now have a portfolio below $5K.

If your portfolio in Stake is below $5k and invest with a long-term strategy, Stake Unlimited for free is compelling. We encourage you to fund your account before the deadline to take advantage of this one-time offer. The USD$108 annual fee for the Unlimited Pack will be better spent on further investments in the future. You should not try to stretch your financial position to reach this level.

If you fund your account to try and bring your portfolio up above the $5k requirement, we suggest caution. With markets in a correction then leaving it as cash in your US Wallet until the 12th seems prudent. If you continue to invest and the market falls further you may again be under the required value.

… the ugly

If you cannot afford to fund your Stake account to gain the Stake Unlimited for free benefit, then don’t. Financial prudence is key here, there is no point investing if you do not have emergency funds or it places your budget under pressure. If you only place small trades then you should probably stick with the Starter Pack. The free option is still a best-in-market offer and will likely be for some time.

We continue to ask Stake to provide discounts for annual Unlimited Pack payments up-front. The usual discount rate we see is 20-25% for annual payment. This translates to 2 or 3 months free if you pre-pay. We are also asking for additional payment options like Credit Cards to pay the subscription fees.

… and the workaround

There is also the option of only temporarily funding your account until after the 11th of March. Transfer the cash there now, and then withdraw it afterwards. You will lose FX fees both ways if you use this workaround. For some people this may be a best of both worlds strategy.

UPDATE 2/3/2020: Currently it will take AUD $7800 to meet the funding requirement from scratch at current AUDUSD rate of 0.6540c. You would pay USD $54.60 in FX margin fees to fund the account, and then slightly less while bringing it back. Just doubling the FX fee gives USD $109.20, close enough to the annual cost of Stake Unlimited. If you temporarily fund your account, you can have Stake Unlimited Free from the second year.

Our recommendation

We have been a little reserved in making a recommendation for a broker to access the US markets. We had started with Stake and generally liked what it had to offer. As we were poised to recommend Stake as a good platform, the new brokerage packs were announced. We saw the subscription model as a step backward for existing investors.

What was missing before was providing extra value for the subscription fee, and the impacts to founding members. Those impacts are now resolved for most people. With a commitment to continually adding features to the app and add value over time, we have no further doubts. We believe that Stake is the best platform available for Australian Investors to access the US markets. If you have not already, Sign up with Stake with referral code joeld269 to help us out a little.

Well placed for new competitors

We believe that the offer from Stake will be competitive going forward, even with additional competition expected this year from discount ASX broker, SelfWealth, and UK Fintech provider Revolut. The move by Stake to give Stake Unlimited for free and ‘lock-in’ their existing customer base is a shrewd move and will make it harder for new entrants to get a foothold.

The author is an active customer (both funding and trading) with Stake, and will qualify for founding member status.
The author has had in-confidence discussions with Stake within the last 28 days.
No payment or inducement has been provided by Stake for this article.
Den Of Dividends has not received nor agreed to any editorial control on this article.

The new updated brokerage packs as announced today by Stake. Unlimited and Fractional trades are back on the Free Pack.

Stake makes Unlimited and Fractional Trades free

Stake announced that unlimited and fractional trades on the Starter Pack this morning. This represents a change to the proposed subscription brokerage model. A marketing email was sent to Stake customers early this morning with the details of the change. There has not been a blog post covering the pack changes published at the time of this article.

The changes address the feedback of users who have been quite vocal on how the original changes affected them. Some strong comments left on the r/AusFinance subreddit and a number of other online forums like Whirlpool. Many users there were quite unhappy with the changes, with one user selling all holdings within Stake and cashing out.

While we here at Den of Dividends have been quite direct on the proposed changes. To Stake’s credit both CEO Matt Leibowitz and Stake representatives asked us for feedback. I personally met with a rep just prior to their launch into the crowded UK market this week. We put our case forward and floated some additional ideas.

The fees on Brokerage Packs do not take effect until July. Where customers do not specify a paid pack, they will be placed on Starter Pack.

Revised subscription model announced

The new updated brokerage packs as announced today by Stake. Unlimited and Fractional trades are back on the Free Pack.
The new updated brokerage packs as announced today by Stake. Image supplied

So what has changed? Unlimited free and fractional trades are back in the Free Pack at the expense of the Limit Order function. This is a fair swap considering the unlimited trades being reinstated. My preference would see limit orders remain on the Starter Pack but providing free trading limits what is possible. Australian timezones mean placing an order pre-market may result in a costly fill if the stock gaps up at open. Having limit orders available means that Starter users will not see that occur.

Although the existing Starter Pack gets a bit of love, the Unlimited and Black Packs have had little change. The paid packs need to add more value to drive the change in business model. Customers do not want to pay an ongoing service fee if it is not in their interest. But unless you add new features or benefits, it makes it hard to justify paying that monthly fee. Options Trading is being considered by the Stake team which helps that value proposition. Otherwise the only additional value today is being termed Analyst-grade market data on the Black Pack.

What is in the future?

The announcement email suggests that the Starter Pack will remain as unlimited free trades and fractional orders going forward. Reading between the lines, we understand that no additional features will be added to the Free Pack. All new features will be limited to paid packs to drive revenue.

Here is what we are now asking Stake to consider as new features in paid brokerage packs:

  • An annual option for paid brokerage packs at a discount. Additional options for payment method (credit card) instead of from the USD account;
  • Reduction down to the lowest possible FX spread through OFX transfers;
  • Options trading, with L2 (spreads/covered calls) in Unlimited Pack and more functionality (L3/L4) in Black;
  • Brokerage-processed DRP in Unlimited, with the ability to turn on reinvestment for each individual stock or in bulk;
  • Additional order types, including AMEND on Unlimited;
  • Adding of additional exchanges – ASX and NZX with cheaper brokerage would be attractive;
  • With the UK launch, London Exchange (LSE) access would possibly provide additional value.

We will be continuing our content on Stake going forward. This includes a comparison how the new packs compare for investors in Australia.

The author is an active customer of Stake at the time of this article being published.
The author has had in-confidence discussions with Stake within the last 14 days.
No payment or inducement has been provided by Stake for this article.
Den Of Dividends has not received nor agreed to any editorial control on this article.

OPINION: Stake ignoring existing customers

Stake US trading web interface. The new subscription model for brokerage shows Stake ignoring existing customers.
Trading US Shares on Stake will become more expensive for most people from July 2020.

I trusted a platform. I invested through it, understanding the pricing model. That model now changes, and I will pay more and look elsewhere for an alternative because Stake is ignoring existing customers.

Such is the life of a start-up. We are talking about businesses without a proven profitability model, let alone a proven business model. The Fintech industry is one of these disruptors to the Finance industry. The whole concept of being a disruptor in a certain industry is to force change. When that change happens, you need to adjust to the new conditions and your competition.

New lower-cost investing opportunities coming online such as the Commsec Pocket ETF app with a $50 minimum transaction value will drive competition for investors cash. US Market broking will see low-cost competition in 2020 from ASX broker SelfWealth, and UK Fintech outfit Revolut who already has digital banking customers in Australia.

A new revenue model with pending competition

Stake has this week adjusted to the new conditions. After bringing zero-commission trades to Australia, and expansion to New Zealand, UK and Brazil, a lack of cashflow seems to have precipitated this change. They will now only provide two free trades per month, additional trades will be charged at USD$5, and both fractional shares and limit orders will be removed. That is unless you pay a USD$9/month subscription fee.

Stake's new brokerage packs limit  zero-commission trades on the free plan to just two per month, and encourages users to move to a subscription brokerage model.
The subscription model proposed by Stake increases costs for most customers.

The existing revenue model for Stake seems to be similar to most other low-cost brokerages. RobinHood and M1 Finance mostly get revenue from Net Interest Margin on uninvested cash in customer accounts. Additionally they sell order flow data to high-frequency trading firms. These firms then ‘bet against’ the order flow being sent to them. Stake have not confirmed or denied order flow data being sold. They do say that they “don’t believe in making our customers the product,” however but the way the app places an order is a little suspect.

Stake was built on zero-commission trades. They instead charge a margin on Forex rates when their customers fund their USD accounts so they can buy shares. Every AUD$500 attracts a fee of around USD$3.50. The resulting funds in the ‘USD Wallet’ can be used to trade with, with no limitations on the number of trades. There is a USD$10 per trade minimum order value however.

After carefully reading the blog post announcing the changes, and running a few sums, I believe that Stake has misunderstood the way that people invest via ‘apps’ and would not be profitable. With the new $9/mo subscription fee that they clearly want all customers to use, then we can start understanding the issues.

1300 magic number

I found it easy to reverse-engineer the fee within Stake – how much do you need to deposit each month to get to the FX Margin Fee to about USD$9 to match the subscription fee? The ‘Add Funds’ function on the website is very transparent and shows the fees of a proposed transfer.

Stake provides great transparency on fees when funding your USD account.

So with that, the institution of a $9 brokerage subscription fee matches a investors funding at the rate of AUD$1300 per month. I doubt this was the original business plan ARPU figure, but as the company grows and adds developers then costs will increase.

I personally have funded $1300 in a month, and far more than that. Sometimes I fund far less or nothing at all. My goal is to invest into value stocks so sometimes that may be in the Australian Market, or the US market. Stock prices, opportunities and value drive my account funding. Overall in the last 6 months I have funded around USD$16,000 into my stake account.

Most investors would be getting nowhere near that amount of funding per month. I would suggest that most people would max out at approx AUD$500/month worth of funding, and the remainder going into the ASX or savings. This means that revenues for Stake will simply not be enough to survive yet alone grow.

Dividend Reinvestment blues

One issue that Stake may be running into is the cost of trades from customers reinvesting dividends into new shares. This generates no real revenue other than some Net Interest Margin in the USD account. If customers are not funding accounts, then the amount of revenue they can earn will be lower.

An additional complication here is that Stake has promised to reduce the FX Margin fee. No details has come though on this, and we will likely not know the real rate until much closer to July. My own personal opinion is that it should be no more than USD$1 per AUD$1000 however we shall see in time.

Cost of trades

One hint towards the cost structure of the Stake product offer is available from their market clearinghouse partner, DriveWealth. In order to have access to the US Markets and not have to become a full direct partner of the NYSE and NASDAQ, Stake uses a wholesale product from DriveWealth instead. Other Fintech providers also use DriveWealth’s services such as UK Neobank and recent Australian financial services entrant, Revolut.

DriveWealth also provides direct-to-customer broking in the US, and provides the following fee structure for retail clients:

DriveWealth’s default commission structure is a minimum of $2.99 per trade for whole shares and $0.99 per trade for fractional shares. Alternatively, you can opt for the subscription program which makes investing even more affordable. For just $4.99 per month or $14.97 per quarter, you can trade as often as you want for only $0.01 per share with no minimums.*

For instance, a subscriber would only pay a $0.05 commission to purchase 5 shares of Apple stock, as opposed to the $2.99 that non-subscribers would have paid for the same trade.


From here it becomes easier to see the costs that Stake are incurring, and that the subscription packs they are offering seem to align with the DriveWealth offering. We do need to remember that a wholesale platform cost will likely see around a 30% discount on transaction costs and possibly more on volume breaks.

The remaining revenue from Brokerage packs after paying DriveWealth will be put into building more systems such as the App, paying their developers and other staff, and additional marketing.

Existing customers in the cold

The biggest issue on the customer side is that we feel like we have been duped. Part of the reason why we were okay with the FX Margin was that we did not need to pay any brokerage once we had dividends being paid to our USD account. We could then reinvest these free of any fees.

Additionally, the provided AUD account (a Macquarie Cash Management Account) seems to also be rebating at least some of the interest, with my own account receiving a few cents each month if there was an amount of money in there in the thousands of dollars.

Customers are so important to startups where the cost of customer acquisition is a major reporting metric. Losing customers already gained here would be catastrophic. Gaining new customers will cost more, and competition will raise customer acquisition costs further. Facing serious competition slated to come to market this year, financial financial trouble could be on the cards if there is a customer exodus. Stake ignores existing customers at their peril today.

What should Stake do here?

Luckily, Stake have published a number of comments, including one to the Reddit thread at r/AusFinance where they stated that they will ‘continue evaluating the packs based on feedback from the Stake community’.

Well Stakers – here is what I would do.

1 – Acknowledge customers today

We, your customers, have allowed Stake to be what it is today. We elected to trade with you – many stated they don’t like the product structure and will wait for others in the market. Show us a little appreciation please.

The way to do this is to soften the blow of the changes. This can be done by recognising funded customers prior to this announcement with ‘Founding Customer’ status.

Founding customers should have some benefits over new customers on the Stater/Free pack, and I would suggest that any or all of the following would help:

  • 1 or 2 additional free trades per month;
  • Allow 1 fractional trade from the free trade allowance (on a set execution schedule and/or chunked like M1 Finance);
  • Retain the ability to place good-for-day limit orders only;
  • Some sort of discount on at least one additional trade;
  • Maintain the USD$10 minimum value trade requirement, with new Starter pack customers seeing an increase to USD$15/$20.

This will allow most existing customers to feel like they have some benefits over new customers. This might stem the flow away from your platform which is already occurring.

2 – What is the new FX Margin?

The promise to drop the FX Margin fees was made, however no details were actually provided. It’s clear you will not drop them anywhere near the required amount to offset most customers monthly fee. This means additional costs for us to trade with you.

Do the right thing and be upfront with us. Tell us what the planned margin is. If it is not final, give us a range you are considering.

Additionally, having an different FX Margin for free level would be a reasonable thing to do here. Maintaining it at the current level may encourage larger investors funding larger amounts onto your subscription plans.

3 – More exchanges, cheaper

It’s quite simple – You should be a full Market Participant of the ASX and NZX. Provide both sides with simple, low cost cross-Tasman consolidated trading for $5 per trade on either side. Far less than current brokers and you have a winner.

After that, lets talk about the UK. The more markets, the more useful you platform becomes. Freetrade are already adding European bourses for their customers with Asia after that. Add the ASX and NZX and we can trade globally for very little.

4 – Improve the Unlimited Pack

There’s a simple question here – what extra value does a $9/month subscription fee give me? Answer on the current pack is very little. If you are not going to deliver new value that customers want, you get this reaction. Additional order types and some new platform features being delivered soon is not enough. Those merely bring you closer to what similar brokerages are delivering overseas.

Here is what the Unlimited Pack should deliver:

  • Lower the minimum order value to USD$5;
  • Options trading (when available) – L2/Covered calls;
  • Dividend reinvestment on a per-stock basis;
  • Dividend reporting on portfolio & company basis, including confirmation of payment or DRP stock credited;
  • Tax report/statement with correct ATO FX rates on dividends.

These are new or increased value items, and will show us we are getting new features for the additional cost. For example, I could easily cover the cost of Unlimited Pack with the ability to write covered call contracts on two of my stocks.

5 – T+0 not worth $10 per month

I find it interesting that you would grant day trading status to an account for USD$10 per month. Even more so when our accounts have buy orders deducted immediately from our balances. This should be a feature across all paid packs with order value limits. It has minimal risk involved to you.

The only major benefit would be ability to trade on In-Flight funding transfers. That has been a highly-requested feature, but it would kill your express funding fees. I am sure some people would want it, but again you already have the money from our AUD Wallet and it has minimal risk once OFX confirms that FX Order.

Black is simply not worth an additional $10 for that feature. It is an absolute moneygrab which should never have been released without significantly more real value given. Upcoming competitors will beat you on that because they already offer it for less. Instead:

  • Throw in a branded debit card attached to the Macquarie Cash Management account;
  • Provide Crypto trading access;
  • L3/L4 Options access subject to account value minimums;
  • Automated investment from deposits similar to M1 Finance.

Remember your two most likely competitors in 2020. Both already have additional features and good customerbases that adding US Market access to will make people jump over to their product because it offers more overall.

The Wrap

We will continue to publish more content on Stake ignoring existing customers, and how the changes progress and get amended over time. Look out for another article outlining the alternatives to Stake and new competitors entering the market.

DISCLOSURE: The author is a customer of Stake and has holdings of NYSE and NASDAQ listed companies within their account at the time of this article being published.

Zero-commission trades get a Stake through the heart

After just over two years of providing zero-commission trades in the US market, Australian Fintech operation Stake (‘HelloStake’) has announced changes. The bomb dropped this week on their customers based in Australia, New Zealand, the UK and Brazil amongst others. The threat? Pay up, or lose the features you have.

Stake Brokerage Packs announced, kills zero-commission trades for free.
Zero-commission brokerage provider Stake has this week moved from a free model to a subscription model.

Stake was launched in 2017 with the aim of providing cheaper and simplified US Market access for Australian investors. The business i funded by Forex margin on AUD/USD transfers, and skimming interest earned on cash balances. While not confirmed, Order Flow information is likely sold to high-frequency trading firms to buy against the orders from Stake. This happens with most brokers providing zero-commission trades for another source of revenue.

In a country where Stake’s competitors spruik themselves as ‘coming to Australia soon’ and have 90,000+ people signed up on a waitlist with no launch in sight, the local start-up has a small yet loyal following.

Subscription model for brokerage announced

The news dropped at 8am last Thursday morning (January 9th, 2020) in an email sent to all customers by Stake CEO, Matt Leibowitz. A blog post on the Stake website was also published with some additional details. This announcement confirmed that zero-commission trades were being withdrawn and replaced with a subscription-based model instead. The spin? Stake will be Introducing Brokerage Packs.

The announced changes are detrimental to existing customers. For those who have already paid the FX margin fees to fund their accounts in the US, you will incur further costs to trade. Additionally the featured being added are minor at best and could not be considered as a major feature. Community requests such as options trading, or new markets have not been promised at this time.

The major changes to the existing zero-commission trades offer are:

  • An undertaking to reduce the FX margin on transfers between AUD and USD funds (however no specifics on this was announced);
  • Free tier remains but limited to 2 trades per month (USD$5/trade thereafter);
  • No purchases of fractional shares; and
  • At-Market orders only (no limit orders available).
Stake's new brokerage packs limit  zero-commission trades on the free plan to just two per month, and encourages users to move to a subscription brokerage model.
Stake’s new brokerage packs heavily reduce the free level features and levy high per-trade commissions to encourage users to move to a subscription brokerage model.

Stake will force maintaining the existing unlimited zero-commission trades and fractional share orders on your account with a USD$9 per month subscription fee. This is being called the ‘Unlimited’ pack, and also gives ‘Priority access to new listings’ and ‘Priority Customer Support’.

An additional ‘Black’ brokerage level was announced, where for USD$19 per month you can take advantage of trading on your unsettled funds. We believe it likely that funds in flight between your AUD and USD accounts will be included in this too.

Customers unhappy as costs increase

The customer outrage on various forums was immediate – the r/AusFinance subreddit was particularly scathing on the changes which on the surface appear to be forcing investors into subscription model pricing, or else suffer a significant reduction in the service on the free level.

The main complaint online centred around the launch of the product without a sustainable business model forcing a change. Other complaints around no additional benefits for early adopters, and the very high cost of additional trades on the starter plan were noted. Two additional trades on Starter Pack will cost more than the monthly fee for Unlimited Pack.

Stake has commented that the changes are needs to maintain a sustainable business model and to roll out improvements to the service faster. The company has been criticised previously for a lack of new features and slow implementation. Poor reporting is another complaint, is sourced directly from their market clearinghouse partner, DriveWealth.

What comes next?

Being the only zero-commission trades brokerage for US Markets within Australia, Stake has pricing power to make changes until competition appears. While Robinhood has stated that they want to come to Australia, nothing has occurred yet other than amassing 90,000 people on a waitlist.

Requests for information from other brokers with zero-commission trades like M1 Finance and WeBull have inevitably come back with non-commital responses. Most of these are similar to ‘We are concentrating on improving our platform and serving the US Market at this time’.

Stake’s new brokerage packs and account restrictions will take effect from July. The company will be rolling out new features and updates almost immediately. The FX margin has not yet changed however Stake has promised that it will be reduced prior to the new fee structure. Maintenance on the platform is already occurring in preparation for updates and new features.

We will be following up this article in the near future with an opinion piece regarding these changes in the Stake business. We will also investigate alternatives for affected investors who wish to move to another broker as a result of these changes.

DISCLOSURE: The author is a customer of Stake and has holdings of NYSE and NASDAQ listed companies within their account at the time of this article being published.

Vts or IVV?

VTS vs IVV, and why they are both stupid choices

So, you have decided that 1.5% interest on your money is unappealing. Bank account returns no longer beats inflation. Your pile of money in the bank is worth less every day. Your research into what new investors should start investing in will find a pervasive theme that Exchange Traded Funds or ETFs are a good idea. Rather than pick one or more individual companies, purchasing an ETF instead represents many stocks within one. The best part is that you can buy these ETFs through your stockbroker just like a normal company share.

The US market is the biggest in the world and has seen incredible growth since the Global Financial Crisis. The investing community usually suggest two ETFs to gain exposure to the US markets. These are VTS, Vanguard US Total Market Shares Index ETF, and IVV, iShares S&P500 ETF. Both these ETFs trade on the ASX in Australian Dollars.

The US Market is now reaching some quite dizzying heights. Financial analysts are questioning if the market is overvalued. Will the low interest rates and cheap debt cause a market correction and see the US economy slip into a recession? Are these two ETFs a good idea to invest in today? Looking at what is on offer, I do not believe these ETFs are suitable for new investors looking to start their investing journey with a Dividend Growth Investing (DGI) strategy. Lets discuss why I have come to this conclusion.

High unit cost & unfavourable AUD rates

After the GFC, pricing on the US Index ETFs were quite low for Australian Investors with a strong AUD, at one point buying in excess of USD$1.10 per AUD courtesy of our stronger interest rates and the carry trade. This maintained pricing within a range even as the US Market started to improve. Once our interest rates started to come back more in line with the US, the carry trade unwound and the AUD slid back below the 80 cent mark. Meanwhile the US markets started to fire on Helicopter money in Quantitative Easing from the US Federal Reserve.

Today, we are seeing VTS above AUD$230/unit, and IVV at an eye-watering AUD$457. This means a $2,000 investment in either only sees 8 and 4 units of each respectively. Since the price is so high, the inability to take dividend returns and reinvest to get the compounding effect that we all love to drive our wealth higher simply does not exist.

Yield dragged down by Tech Stocks

One of the major changes to the S&P 500 over since the dot-com bubble popped is that massive tech stocks are now some of the most valuable companies in the world, and take up a huge chunk of the index. While Microsoft and Apple are the two largest companies in the world and do pay a dividend, both are yielding less than 1.4% p.a. each. The remaining big tech companies in the ten largest companies on US Markets, Amazon, Alphabet (Google) and Facebook all do not pay a dividend.

Between all 6 companies (Google counted twice with two separate stock listings) the overall yield is very low. Adding to this low yield, Berkshire Hathaway famously run by Warren Buffett is the 5th largest company on the US Market. Berkshire also infamously do not pay a dividend. All you are left with is Johnson & Johnson (JNJ), Exxon Mobil (XOM) and JP Morgan Chase (JPM) who do pay a reasonable dividend of 2.8% p.a. or greater.

An overall dividend return between 1.40% and 1.60% p.a. on these indexes is really not strong enough for dividend-focused investors. Much of this low yield is caused by a vast number of overvalued companies at P/E ratios that are generally to high. You can get better returns on a Bond ETF, or even sticking your money in a bank with far less risk.

Reinvestment problems

Most of the audience here will prefer dividends to be paid at reasonable yields, lets say greater than 2.8%. We also want to grow investment positions over time by reinvesting these dividends and unlocking compounding returns over a period of 20 years or more.

Only IVV provides a Dividend Reinvestment Plan (DRP) as part of the ETF. This allows for your dividends to be ‘paid’ as shares onto your holding balance without incurring brokerage fees. At the much higher level of unit cost, you would need around $50,000 invested in IVV in order to gain one single share per year at the current yield. I do not believe you are really going to see any meaningful compound effect with that unit quantity increase.

VTS on the other hand is a trust structure under Vanguard and domiciled in the US. Tax laws state that they must pay cash as a dividend. While the same $50,000 investment in VTS would gain you a cash payment worth around two additional units per year, you would need to buy this as an on-market transaction and incur a brokerage fee. While some brokers can be around a $10 brokerage fee per trade, a number of brokers charge $15 or even in excess of $20 per trade. This eats into your profits and increases your cost price average up significantly. You can add additional cash to make your purchase larger to offset the impact of brokerage however.

When is VTS and IVV appropriate to purchase?

Quite simply – at far lower P/E multiples, and ideally with a strong AUD at around 85c or higher. The benefit of these ETFs is snapping them up at low prices such as the opportunity we had in 2008-2011 with the AUD so strong against the USD.

You then let the market drive the capital growth of the underlying stocks to increase the value of your holdings instead of dividends. A $10,000 investment in 2009 with dividends and capital growth would now be a holding worth around $40,000.

As a result, for dividend focused investors, these are less suitable for long-term growth of your holdings, and later converting those dividends to income in retirement.

Alternative US-market ETFs for Dividends and compounding

At this stage there really is no low-cost, high-yield ETF for Australian investors trading on the ASX. Both VTS and IVV offer very low management fees of 0.03% and 0.04% p.a. annually. This is a tiny loss in yield while the alternatives have far higher fees.

Protect yourself with a MOAT?

MOAT is one that often mentioned and seems to be a favourite with some writers at Motley Fool Australia. This is an ETF of companies with a ‘wide moat’ meaning harder to disrupt or competition is hard to come by. One concept that or that reason they are expected to do well and continue growing and paying safe dividends. The yield on MOAT of 1.0% p.a. and a management fee of 0.49% p.a. is twelve times higher than IVV for example which seems too high. Dividends on MOAT will only be paid annually. This further cuts down compounding returns. I will pass on MOAT, thanks.

This could be the answer….

ZYUS is the most interesting candidate on the ASX. The ETFS S&P 500 High Yield Low Volatility ETF gives ASX investors a compelling option. For US-based exposure with a great dividend return this ETF provides excellent yield while having a manageable management fee when taking the yield into account. I am not a massive fan of some the holdings in the fund like Iron Mountain being the single largest holding. I do hold many of the individual stocks in this ETF with my US broker.

Returning a far larger dividend payment than any other US-based ETF at comparatively high 7.72% p.a. yield on a trailing 12-month basis, it makes the competition look weak in comparison. Price is also reasonable, trading between $12 and $14 for the last 12 months which opens up a serious opportunity for reinvestment. ETF Securities has a DRP available as well, which means that you can get compounding returns without brokerage fees.

If I can get a 7% return on investment, I can double my money every 10 years. While past performance cannot indicate future performance, it seems like ZYUS is the best dividend investment on the ASX for US exposure while beating bank interest by a factor of 4. This performance does come at a price however, with a 0.35% p.a. Management Fee it is high in comparison with many other funds. It could be argued that the fee is justified by the returns. It also compares favourably with SPHD in the US at a 0.30% Management Fee, but only a 4.1% dividend return. SPYD has a sightly higher return, but a 0.07% p.a. Management fee. Based on this, I would hope for an MER reduction over time for ZYUS as the fund grows to a larger size.

Based on last closing price of $13.72, a single $2,000 investment in ZYUS would net you 164 shares. Highly beneficial quarterly dividends and compounding give approximately 11 additional shares in your holdings in the first year with DRP. The 10 year projection on dividend income reinvested alone gives a 114% gain or a doubling of your money. If you are smart with investing at a lower price and averaging down in any correction then ZYUS might be one of the ultimate long-term holdings for future income.

The data shows the incredible dividend-only compounding effect of a seven percent interest or dividend rate, before consistent additional cash added to the holdings over time. If this looks like a interesting ETF for your portfolio, then please do your research and consult with a licensed Financial Planner before making investment decisions.

DISCLOSURE: At the time of writing, the author held no positions in any ETF mentioned: VTS, IVV, MOAT or ZYUS, and no planned trades on these positions within the next 7 days. Figures shown are based on past performance. Past performance is not an indicator of future performance.