Tuesday, 10 February 2015

2015 Goals: Trimming the Trading Fees

Investing is a potentially lucrative move to make. However, it is not one which is without its costs. One of the often forgotten costs involved in investing are the trading fees. They are such a part of the investing landscape it is often the case we just pay them without much thought. But should we be overlooking their importance so easily?

For British investors the fees chiefly amount to the commission charge paid to your broker and stamp duty paid to the government (although not all London listed companies require payment of stamp duty). And, of course, when buying foreign equities, although we may lose the stamp duty we have to factor in the currency exchange charges.

Over the course of the year these can add up.

Of course, the biggest fee in this is the broker commission. My particular broker--iWeb--is one of the cheapest around at £5 each transaction. For automatically reinvested dividends the fee is 2% of the value reinvested. All of these are then topped up with a 0.5% stamp duty.

Obviously, the £5 transaction fee is very reasonable indeed. In contrast, the dividend reinvestment cost is not the cheapest available but equally is not overwhelmingly crippling. They are easy to be subconsciously factored into and absorbed into our investment calculations.

"Dead" Money

That being said, despite these not unreasonably high charges it still meant that last year 1.44% of my invested funds last year went towards paying these charges. That is over £225 in total.

A hidden cost of this is also the lost dividend income from this "dead" money. Assuming a 4% yield I would be losing £9 per year through this payment of £225.

As a result, I am going to include a new investment goal for this year: to reduce my overall trading cost for this year.

If I invested only my £6,000 target for the year with last years transaction cost rate (1.44%) this would mean I would expect to lose about £86 to this "dead" fund. Not a lot you may say especially when total return is likely to be much higher. True. But it is another area where again things can be improved.

As such, I want to set my new trading fees goal at 1.3% or less of my total investment this year. This would mean on my £6,000 targeted investment I would pay just £78 in fees as opposed to £86. That £8 difference is an around 10% reduction in fees incurred.

Plugged into last years overall costs this would have meant paying £22.50 less in fees (£202.50). Maybe this won't set your wallet alight. However, if you think of it as equivalent to a 10% dividend increase it suddenly seems a very worthwhile saving indeed!

So, how do I plan to achieve this? Well, currently I have two chief methods.

1: Increase the total value of each transaction

This is the most obvious change which I think will help me most achieve my goal. Last year my average transaction was around £500 each investment. With the £5 trader commission and 0.5% stamp duty this meant that I was chucking about 1.5% away in fees. This can obviously be improved upon.

If I shift my average investment total up to £750 with the same fees structure this would cost me in total £8.75 in fees. In total this would be 1.16% of my total investment thrown down the fee pit. A nice slice off my expenses.

What is more, as I have now got quite a diversified portfolio of companies (over 20) I am quite happy to look at putting larger stakes in a smaller pool of new investments this year. I don't need to spread my investing cash too thinly across as many companies this year.

2: Stop Automatically Reinvesting Dividends

This one I will have to think about. I have previously discussed the advantages and disadvantages of automatic reinvestment or targeted reinvestment of dividends. There is something to be said about both approaches. However, I do maintain that over the long term targeted reinvestment--if you have the time and inclination--are better. 

That being said, currently, I have instructions for my dividends to be automatically reinvested where they can be. As stated earlier, in addition to the 0.5% stamp duty, my broker charges 2% on every dividend reinvestment transaction.

This does, of course, add up. My January GlaxoSmithKline dividend (£35.91) which was invested in two new shares for a consideration of £28.52 had a fee of 71p added on top. Not a lot in itself maybe. However, that 71p is equivalent to about 2.5% of the total (re)investment. 

Now if all of my targeted dividend income for this year--£800--was reinvested in this way I would spend £20 on fees. 

Of course, in reality the impact of this higher dividend reinvestment charge may not be apparent in my final 2015 charges percentage. After all, not all of my dividends are automatically reinvested. What is more, my reinvested dividends should only represent a small proportion of my invested funds. Consequently, the impact of this higher fee rate is not immediately apparent.

As it stands, I plan to keep automatically reinvesting my dividends. However, if it becomes apparent that this is severely affecting my fee percentage rate for the year I will reconsider this decision.

[Creative Commons image reproduced from Flickr user images money]


  1. Wait, you have to pay a 0.50% stamp duty on each share transaction you make? This is too much. Can you open a US brokerage account, and then buy UK based shares listed in New York to avoid that onerous fee?

    It seems that rather than automatically reinvest dividends, it might be best to simply accumulate them in cash, and pool them with deposits before you make a new investment.

    Good luck in your dividend investing journey!

    Dividend Growth Investor

    1. Thanks for dropping by DGI!

      We do indeed. Strictly speaking it is not Stamp Duty per se but Stamp Duty Reserve Tax but the effect is the same.

      Opening up a US account would be absolutely brilliant. Unfortunately, unless you have a US bank account it is hard to open one. Similarly, without a US address it is hard to open a US bank account.

      That being said, even if I could open a US brokerage account the cost of currency conversions would probably amount to much the same as the stamp duty value. Also, many of the companies I have invested in are no listed in the US.

      Some equities SDRT is not charged. For example, companies listed in the UK but registered overseas (such as Banco Santander) or FTSE AIM listed shares are not charged.

      Oddly enough, I am in the process of writing up my changing views of automatic dividend reinvestment. Currently I am keeping that turned on but I suspect that soon I will change my approach. I will finish that off soon and publish it!

      Thanks for the words of encouragement. I am making solid progress which is great. Hopefully I keep up the pace!