Dividends on M1 Finance
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M1 Finance focuses on automation of your investments and building wealth in a relatively passive way. Within M1 Finance, you have the ability to buy a variety of stocks and ETFs ranging from high risk growth stocks to lower risk income generating ETFs.
As the investor you have the ability to determine the structure of your portfolio or “pie” within M1 Finance. For investors who would like to hold dividend paying stocks or ETFs within your pie, you may be wondering “so what happens with my dividends?”
Within M1 Finance, all dividends are held in cash in your account until the value reaches $10. Once your total amount of dividends reaches $10 in your account, M1 Finance automatically reinvests them into your pie. This allows you to build wealth through the power of compounding, and without selling the actual shares themselves.
Earn Compound Interest By Reinvesting Dividends
“Compound interest is the 8th wonder of the world.” – Albert Einstein
Dividends offer a return of capital to the shareholder without having to sell the stock. This allows the investor to reinvest dividends and grow their account using compound interest. Compounding is the ability to reinvest capital (dividends, interest, capital gains) to generate additional earnings over time.
Think about it like this: You invest $1,000 into Company A and they announce a 5% dividend at the end of the year, thus you earn $50 in dividends. You then reinvest the $50 in dividends and buy more shares. Now you have $1,050 worth of Company A.
Next year, they announce another dividend at 5%. You now receive $52.50 in dividends and you reinvest them back into Company A. You now have $1,102.50 worth of Company A stock.
If you followed this strategy and reinvested your dividends for 20 years, your $1,000 investment would be worth $2,653.
If you did not reinvest your dividends, your $1,000 investment would be worth $2,000. ($1,000 worth of stock + $50/yr in dividends for 20 years = $2,000)
This is why compounding is such a powerful tool in the investment world. It allows you to build interest upon interest and can result in fortunes being built.
Earned vs Paid Dividends
All earned dividends within M1 Finance will show up under market gains in your portfolio. These are the total dividends that you have earned over the life of your portfolio, not necessarily the total you have received. Paid dividends are the amount of dividends you have actually received in cash. Paid dividends show up under each security in your activity feed.
To understand earned vs paid dividends, we must focus on two important dates; the ex-dividend date and the payable date.
The ex-dividend date
This is the date by which you must own the stock to receive the dividend. It is often 1 day before the date of record. Ex-dividend simply means: if you purchase the stock on this date you are NOT entitled to the most recent dividend.
On the date of record (1 day after the ex-dividend date) the company will record everyone who is entitled to receive a dividend.
Lastly, the payable date
This is the date you actually receive payment for the dividend. The payable date is typically around one month after the ex-dividend date and payable date. If you sell the stock after the date of record, but before the payable date then you are still entitled to a dividend payment.
Is this the same as a DRIP?
Most dividend investors are familiar with a DRIP, or a dividend reinvestment plan. With a DRIP, the dividends received are used to purchase more shares of the issuing stock. This, again, allows you to earn compound interest.
Most brokerages out there charge a fee for a DRIP. M1 Finance is completely free. While M1 Finance does offer reinvestment of dividends, it is a little bit different.
If a dividend payment pushes your cash balance in your portfolio above $10, the cash is returned to your portfolio. This cash will be used to purchase whatever you are underweight in.
For example, let’s say you built a pie with 50% Boeing stock and 50% General Electric stock. Fast forward one month and you are now 55% Boeing and 45% General Electric due to the differing performance of the share price. If Boeing pays a dividend and that dividend pushes your account above $10, that money would be allocated into General Electric stock to rebalance your portfolio and return it to a 50/50 split.