How To Buy Shares Without A Broker

A particularly frugal friend approached me recently wanting to know if there was any way to buy shares without the need to pay brokerage fees.

Well the short answer is you can't.  According to the Australian Stock Exchange website:

"All shares listed on ASX can only be bought or sold through a broker. A stockbroker acts as your agent to buy or sell shares on your behalf, for which a fee is charged."

This statement is clear and unambiguous.  However, it got me thinking.  There are actually a few exceptions to this rule.  The exceptions are all share purchase transactions in which the ASX is not directly involved.

So The Long Answer Is Yes ... But In Very Limited Circumstances

There are a number a scenarios where you can buy shares without paying a stock broker.  But just because you can, it doesn't mean you should.  But more on that later.

Dividend Reinvestment Plans

The first option is available to investors in companies which operate a dividend reinvestment plan (or DRP).

Under a DRP, an investor is able to forgo their cash dividend and instead receive new shares to the same value.  As an added bonus, some dividend reinvestment plans issue these shares at a discount to the prevailing market price.

So if you're an existing shareholder of a particular company and you'd like to increase your investment in that company, this can be an effective way of doing it without paying brokerage.  Just be aware that not all companies operate DRPs.

Read more in what are dividend reinvestment plans.

Share Purchase Plans

Share purchase plans offer you another way to increase your existing shareholdings without paying a broker.

Under a share purchase plan (SPP) a company's existing shareholders are invited to buy more shares, normally at a discount to the current share price.  Just like DRPs discussed above, there is no brokerage or other commissions payable on the share purchase as you are transacting directly with the company.

However, also like DRPs, you need to be an existing shareholder of the company.

Rights Issues

Rights issues are similar to share purchase plans in that you can buy additional shares in a company without paying any brokerage.  The main difference to a SPP is that under a rights issue, the number of shares you're entitled to is in proportion to your current shareholding, whereas with a SPP this is not the case.

Share Floats/IPOs

When a company first lists on the Australian Stock Exchange, they normally offer shares to the public as a way of raising capital.  Once again, since you are transacting directly with the company you will pay no brokerage.

If you are interested, here is a list of upcoming share market floats.

Saving A Little Could Cost You A Lot

As I said at the beginning of this article, I don't believe that saving money on brokerage fees should be a primary factor in your decision of which shares to buy.  Saving $20 or so in stock broker's fees may turn out to be false economy if the underlying investment does poorly.

What do I mean?  Well, each of the cases I've described above are very specific and somewhat opportunistic.  If it were me constructing a share portfolio, I wouldn't be restricting my purchases to DRPs, SPPs, rights issues and new floats.  I'd be looking for companies trading at attractive prices at the time I was ready to purchase.

So there is your long answer.  You can buy shares without a broker.  But not just any shares and not all of the time.

Read more about how to buy shares.

Why I Don't Like Dividend Reinvestment Plans

In my last post I discussed dividend reinvestment plans.  I know they are popular with some investors - in fact a quick search on Google yielded a number a websites devoted entirely to dividend reinvestment.  And while I can understand the attraction for some investors, DRPs are not for me.

So in this post I will discuss some of the disadvantages that I see with these plans.

To recap, a DRP allows existing shareholders to increase their holding by forgoing their cash dividend payments in exchange for new shares in the company.  There is no brokerage payable and to top it off, the shares are sometimes issued at a discount to the current market price.

So what's not to like?

Don't get me wrong.  There's nothing fundamentally wrong with dividend reinvestment plans.  It's just that they don't suit me.

Buying Shares When I Want To

I like to choose when and where I invest my money.  Dividend reinvestment limits my ability to do that.

Under most plans, shares are issued a couple of times each year at whatever the market price happens to be when the dividend is paid.  It could be that at the time the shares are issued (and therefore the price is set) I consider the shares to be too expensive.  There could be another company I'd rather invest my money in.  Or I might consider the market overall to be too high.  I might like to hold onto the cash for a while until a suitable investment opportunity arises.

By participating in dividend reinvestment plans, I lose that flexibility - the flexibility to buy the stock I want at a price I think is reasonable.  Instead, I have to take whatever the market says the price should be at the time the dividend is paid.

Too Much Paperwork

When you're being allocated small parcels of shares, a couple of times each year, under multiple DRPs - there's a lot of stuff to keep track of.

While this may seem trivial to those of you with superhuman powers of organization, for the just of us it can be a real hassle.

I admit it.  I'm not terribly well organized.  I love researching little-known companies, reaching for value in obscure places and relaxing while watching my stock portfolio grow.  But the administration side of things bores me to tears.

I dread tax time - the time when I need to find all of the documents which tell me which shares I bought and sold, at what price and when.  And this is where dividend reinvestment plans can be a pain.  Imagine I own shares in a company for 10 years and in each of those years the company pays 2 dividends and for each of those dividends I participate in the DRP - that's 20 individual purchases, plus the initial purchase.  That's 20 different capital gains calculations (I still do my own tax).  That's a nightmare.

Okay.  So maybe I could be a little more organized.  Maybe then tax time wouldn't be such a pain.  But it's still something you need to think about.

Don't Just Buy For The DRP

There are lots of factors to look at before making an investment in the share market. If you do like the idea of dividend reinvestment, by wary of allowing this the cloud your judgement.  With any prospective investment I'm always weighing up the price I have pay against the value I'll get.  To me, DRPs are a very small part of the value side of the equation.

I'll leave you with one last thought.  If you elect to take your dividends in cash like I do, then make sure you don't let them go to waste.  I make sure any income from dividends gets held separately from my day to day spending money.  I still want to reinvest them - just on my own terms.

As I said at the beginning of this post, I know that dividend reinvestment plans are popular amongst some investors.  I'd be curious to hear what others think.  Do you like DRPs?  Why? Or why not?

What Is A Dividend Reinvestment Plan?

Dividend reinvestment plans (or DRPs) offer investors a way to gradually increase their stake in a company.  Instead of receiving a cash dividend payment, investors receive an equivalent amount in the form of new shares in the company.

You Don't Have To Participate

Dividend reinvestment plans are voluntary.  By default you will not participate in the DRP and will instead receive all of your dividends in cash.

If you would like to participate in a company's DRP, you will need to notify the company.  They will normally send out the forms not long after you buy your initial shares in the company, or in the lead up to a dividend payment.

In addition, most plans allow you to receive only part of your dividend payment in the form of shares with the balance received as cash, if that is something you're interested in.

Cost Effective

One of the main benefits of dividend reinvestment plans is that there's no brokerage fees payable.   This means that you can grow your investment in a particular stock gradually over time without paying any commissions.

Another benefit with some plans is that they issue the new shares at a discount to the current share price.  Discounts are normally around 2.5% or 5%.

An Example

Let's look at a real world example.  Woolworths (ASX:WOW) most recent dividend payment allowed investors to reinvest their dividends at a price of $28.882297 per share.  The amount of the dividend (per share) was 67 cents.

If you held 300 Woolworths shares at the time the dividend was paid, you would be entitled to 6 new Woolies shares.  How does it work?

• Total dividend paid:  $201
  This is the total amount of the dividend to which you are entitled (300 shares by 67 cents).
• Shares issued:  6
  This is the number of new shares to which you are entitled under the DRP ($201 divided by $28.882297, rounded down).
• Total cost of new shares:  $173.29
  This is how much the new shares cost.
• Amount carried forward:  $27.71
  This amount is held by the company and is added to the dividend amount used in the next issue of shares under the DRP.

The "Amount carried forward" figure above may need some explanation.  Dividend reinvestment plans only operate in whole numbers of shares.  Since the cost of the shares issued almost never matches the amount of the dividend, the leftover amount is held by the company to be used for the next dividend.

Tax Implications

Even though you don't actually receive the dividends in cash, you still need to include them on your tax return as income.  You are also entitled to and franking credits.  (Please note, this is just my understanding how Australian tax law operates with regard to dividend reinvestment plans.  However I'm not a qualified tax professional so make sure you get your own advice.)

Highest Dividend Paying Shares - The Micro-Caps

Earlier this year I looked at the ASX100 from an income investor's point of view in Highest Dividend Paying Stocks In The ASX100.  Then I gave the Small Caps a going over in Best Dividend Paying Shares - The Small Caps.

Today we're going to look at Micro Caps.  For the purposes of this exercise, I'm going to define Micro Cap stocks as anything outside the ASX 300 (ie. anything outside the largest 300 companies listed on the Australian stock exchange).

So in this first table, you'll find the top 10 dividend payers.

ASX Code	Company Name	Current Price	Dividend Yield	Franking	Payout Ratio
RHG	RHG Limited	$0.40	222.0%	100%	371%
RDG	Resource Development Group Limited	$0.24	139.0%	0%	1546%
BTC	BioTech Capital Limited	$0.09	70.6%	0%	-128%
AIQ	Alternative Investment Trust	$0.55	69.1%	0%	-428%
LRG	Longreach Group Limited	$0.18	55.6%	0%	-943%
AYT	Adelaide Managed Funds Asset Backed Yield Trust	$0.27	19.8%	0%	100%
THG	Thakral Holdings Limited	$0.51	19.6%	0%	-483%
JMB	Jumbuck Entertainment	$0.09	17.7%	100%	-42%
SHV	Select Harvests Limited	$1.47	17.0%	100%	39%
AGJ	Agricultural Land Trust	$0.17	14.4%	0%	91%

Highest Yielding Micro-Caps

I don't know about you, but the first thing that struck me about the list above are dividend yields of 222%, 139% and so on.  I suspect these yields are not sustainable.

For example, there is no way that RHG Group will pay out an 89 cent dividend again next year.  This year was an anomoly and the result of a special dividend in order to return some excess cash to shareholders.

Since I am looking for a high but sustainable dividend yield, I'm going to use the payout ratio to eliminate those companies which are unlikely to maintain their high dividend payments.  The payout ratio expresses the dividend amount as a percentage of profits.  So a ratio of over 100% means they are paying out more than they earn - that can't continue.  And a negative ratio means they were paying a dividend when though they were making a loss.

So let's remove those companies with a payout ratio greater than 100% and less than 0% (negative).

ASX Code	Company Name	Current Price	Dividend Yield	Franking	Payout Ratio
SHV	Select Harvests Limited	$1.47	17.0%	100%	39%
AGJ	Agricultural Land Trust	$0.17	14.4%	0%	91%
MUE	Multiplex European Property Fund	$0.18	13.9%	0%	36%
VTG	Vita Group Limited	$0.25	12.7%	100%	65%
WIC	Westoz Investment Company Limited	$0.92	12.0%	100%	74%
IFM	Infomedia Limited	$0.20	12.0%	100%	73%
AKU	Australian Masters Corporate Bond Fund No3 Limited	$49.58	11.8%	100%	96%
OZG	Ozgrowth Limited	$0.15	11.7%	100%	48%
AIR	Astivita Renewables Limited	$0.70	11.4%	100%	55%
RCT	Reef Casino Trust	$1.77	11.3%	0%	65%

High Dividends / Realistic Payout Ratio

Okay, that got rid of those ridiculously high yields, although there are still some high numbers there.

The next thing I'm going to do is remove Listed Investment Companies, Real Estate Trusts and other Investment Trusts.  I'm most interested in real operating businesses.

ASX Code	Company Name	Current Price	Dividend Yield	Franking	Payout Ratio
SHV	Select Harvests Limited	$1.47	17.0%	100%	39%
VTG	Vita Group Limited	$0.25	12.7%	100%	65%
IFM	Infomedia Limited	$0.20	12.0%	100%	73%
AIR	Astivita Renewables Limited	$0.70	11.4%	100%	55%
MCP	McPherson's Limited	$2.32	11.2%	100%	66%
PFG	Prime Financial Group Limited	$0.14	11.1%	100%	64%
CGO	CPT Global Limited	$0.52	10.7%	100%	88%
MLB	Melbourne IT Limited	$1.41	10.4%	100%	74%
MOC	Mortgage Choice Limited	$1.26	10.3%	100%	57%
BSA	BSA Limited	$0.20	10.3%	100%	41%

Final List

The final list still looks impressive from an income producing point of view.  All 10 stocks yield over 10% and they are all fully franked.

Further Research Required

Remember these are micro caps - the minnows of the ASX.  They're normally less mature and less diversified than their larger counterparts.  Because of their small size, they are quite often not covered by stock broker research reports or by other investment research services.  This means you'll have to roll up your sleeves and do your own research.  It may be time consuming but the rewards can be worth it.

If I were looking at any of these shares for income, the next thing I would do is work out whether I thought the dividend payout levels were sustainable.  I would look at each company's history of paying dividends.  Have they made consistent payments?  I would also look at their ability to pay.  Do they have sufficient free cash flow?  Debt is another import one for me.  I like to see minimal debt on the balance sheet.

However, the reality is that while high dividend yield is nice to have, many investors would be picking over these companies looking at the potential for capital growth.  It is possible that smaller companies today can be larger companies in the future.  The trick is to work out which ones will succeed in that quest

Improving Investment Returns With The Piotroski Method

When it comes to maximising investment performance, I'm a firm believer that good returns are just as much a result the of shares we don't buy as of those we do. It's easy to put a large dent in the returns from our share investments with just one poor investment decision. So with that in mind, today I'd like to discuss a way which can be used to reduce the number of poor investment decisions which we all make. It's called the Piotroski Method.

The Piotroski Method is a system devised by Joseph Piotroski (of the University of Chicago) as a way of identifying stronger companies from among a group of cheap stocks. The problem with cheap shares is that they are normally cheap for a reason. They are often in poor financial health with poor profitability and in the worst cases are at risk of insolvency.

What Piotroski found was that by avoiding the financially weak cheap shares and concentrating on the financially strong ones, investors could expect higher average investment returns.

When we talk about cheap shares, we mean those which are trading at low price to book ratios (current share price divided by net asset value per share). It's a value investor's bread and butter - sifting through shares which are trading at less than the what the company could (theoretically) be broken up and sold for. But there are many value-traps for the unwary. These companies may be teetering on the edge of bankruptcy or their industry may be in structural decline or ... well, you get the idea.

The beauty of the Piotroski Method is that using a set of signals, you are able to rate a company - give it a score (F_SCORE) based on an objective study of the firm's financial statements. This score, out of 9, tells us what sort of financial shape the company is in. The higher the score, the better. He found that companies scoring an 8 or a 9 gave the best overall average returns.

What follows are each of the criteria or 'signals' which, when added together make up a firm's F_SCORE.

1. Net Profit

Is the company profitable?

Award 1 point if the company made a profit last year.

2. Operating Cash Flow

Is the company able to generate positive cash flow through its operations?

Award 1 point if last year's operating cash flow was positive.

3. Increasing Return On Assets

Is the company becoming more profitable? Is it using its resources more efficiently?

Award 1 point of last year's return on assets was greater than that of the year before.

4. Earnings Quality

We want to make sure a company really is making as much money as it claims and in this department, cash is king. We want to see operating cash flow at least as great as net profit. Otherwise this might highlight accounting irregularities.

Award 1 point if last year's operating cash flow was greater than net profit.

5. Long Term Debt Compared To Assets

We want an in investment where the debt is under control. We are looking for a signal that financial risk is decreasing.

Award 1 point if the ratio of long term debt to assets is less than the previous year's.

6. Improving Current Ratio

Another measure of financial risk. Again we are looking for good news in that the ratio is moving in the right direction.

Award 1 point if the current ratio is greater last year than in the one before.

7. Number Of Shares Outstanding

Does the company need to raise capital to support itself? We want a company which can fund itself internally rather than one which needs to undertake capital raising's to fund 'growth'.

Award 1 point if the number of shares outstanding last year was the same as or less than the figure for the year before.

8. Improving Gross Margin

An increasing gross margin is good news. It means the company has improved its pricing power or reduced its input costs (or both).

Award 1 point if the company has increased its gross margin year on year.

9. Increasing Asset Turnover Ratio

The asset turnover ratio provides some insight into how productive a company is with its assets. A higher ratio indicates improvement in how efficiently the company is operating.

Award 1 point if the asset turnover has increased last year when compared to the year before.

If you want to look into the nitty gritty of the research done by Piotroski then you can read more about it in his research paper - http://www.chicagobooth.edu/faculty/selectedpapers/sp84.pdf.

I should warn you that it is fairly heavy going, but I think it is well worth at least skimming through the research paper. A number of important points from the research struck me.

Piotroski found the out-performance of high F_SCORE stocks over low F_SCORE stocks was greatest among smaller stocks. He also found that the out-performance was inversely correlated with the level of analyst coverage. In other words there was more money to be made in shares which were not closely followed by security analysts.

Out-performance was greatest in the 12 months immediately after formation of the portfolio. It seems that the inefficiencies in pricing don't last terribly long.

In the conclusion, Piotroski points out that he has not necessarily found the optimal set of financial ratios for use in predicting the future performance of value shares. Rather, he has shown that by using historical information to avoid financially weak companies and concentrate of strong ones, investors are able to increase average returns substantially.

It's worth stressing that his research focused on 'value stocks' or high Book to Market stocks (ie. low Price to Book).

Best Dividend Paying Shares - The Small Caps

It's time for another 'best dividend stocks' type of post. Last time, in Highest Dividend Paying Stocks In The ASX100, I did just as the title suggests. I scoured the ASX100 looking for shares with the best income potential. While I stressed in that article that more investigative work would need to be done to whittle the list down to a handful of suitable investment candidates, I found the exercise useful and so did a number of readers.

Today's top dividend shares are all small caps. I have used the stocks which make up the S&P ASX Small Ordinaries index as a place to start my search. So based on historic dividend yield alone, I came up with the following list.

ASX Code	Company Name	Current Price	Dividend Yield	Franking	Payout Ratio
TSI	Transfield Services Infrastructure Fund	$0.59	15.4%	0%	194%
COF	Coffey International Ltd	$0.84	14.1%	100%	102%
CIF	Challenger Infrastructure Fund	$1.18	11.9%	0%	135%
APZ	Aspen Group	$0.46	9.3%	0%	84%
ENV	Envestra Ltd	$0.60	9.2%	55%	203%
SPN	SP AUSNET (stapled)	$0.89	9.1%	40%	99%
CDI	Challenger Diversified Property Group	$0.51	8.1%	0%	72%
PMV	Premier Investments Ltd	$6.04	7.6%	100%	158%
AAD	Ardent Leisure Ltd	$1.39	7.6%	0%	94%
HST	Hastie Group	$0.93	7.5%	100%	54%

Best Small Cap Dividend Yields

With the top 3 companies on this list each sporting a dividend yield over 10%, these results look very impressive. However, as I did last time, I will now make a small adjustment and include only those companies with a payout ratio of 100% or less.

The purpose of this adjustment is to remove those companies whose dividend yield is not likely to be sustainable. A company can't pay out more than 100% of profits for very long. The most likely future for such a company is almost certainly one in which a lower dividend is paid.

Here is the adjusted list.

ASX Code	Company Name	Current Price	Dividend Yield	Franking	Payout Ratio
APZ	Aspen Group	$0.46	9.3%	0%	84%
SPN	SP AUSNET (stapled)	$0.89	9.1%	40%	99%
CDI	Challenger Diversified Property Group	$0.51	8.1%	0%	72%
AAD	Ardent Leisure Ltd	$1.39	7.6%	0%	94%
HST	Hastie Group	$0.93	7.5%	100%	54%
WTP	Watpac Limited	$1.71	6.9%	100%	71%
SLM	Salmat Ltd	$4.16	6.9%	100%	79%
BWP	Bunnings Warehouse Prop Trust	$1.82	6.8%	0%	100%
ALZ	Australand Property Group	$3.10	6.7%	0%	93%
GUD	GUD Hldgs Ltd	$9.73	6.5%	100%	81%

Highest Sustainable Dividend Yields

The dividend yields in this list are certainly lower, but with returns ranging from 6.5% up to 9.3% (with the prospect of some capital growth thrown in), this list is certainly worthy of closer inspection.

After doing just that, I noticed that the list is somewhat overweight in property trusts or REITs (Real Estate Investment Trusts) as they are more properly called.

Now I don't have anything against property trusts. They have offered very good income prospects to investors in the past (subject to some hiccoughs during the GFC). However, when conducting my investment activities I consider these to be a separate asset class. For that reason I will filter these out from the list as well.

ASX Code	Company Name	Current Price	Dividend Yield	Franking	Payout Ratio
SPN	SP AUSNET (stapled)	$0.89	9.1%	40%	99%
HST	Hastie Group	$0.93	7.5%	100%	54%
WTP	Watpac Limited	$1.71	6.9%	100%	71%
SLM	Salmat Ltd	$4.16	6.9%	100%	79%
ALZ	Australand Property Group	$3.10	6.7%	0%	93%
GUD	GUD Hldgs Ltd	$9.73	6.5%	100%	81%
HIL	Hills Holdings Limited	$1.87	6.0%	100%	75%
CAB	Cabcharge Australia Ltd	$5.84	6.0%	100%	71%
SGT	Singapore Telecommunications Ltd	$2.31	5.9%	0%	58%
MCP	McPhersons Ltd	$3.39	5.9%	100%	54%

Best Income Shares (excluding REITs)

Now we're getting somewhere. The final list has a number of good investment candidates. They all have good income potential with dividend yields of 5.9% and greater. They are a diverse group of companies across a number of unrelated industies. Seven of the ten companies pay fully franked dividends, while the eighth is franked to 40%. What's not to like?

Well for one thing, there's debt. I know that one one the companies in the list above (Hastie Group) ran into troubles with its lenders just last week and is looking like it might need to undertake a capital raising (a sure way to cut its dividend yield).

I have not applied any filters to the list for things like debt levels or financial performance (ROE, and the like). Come on - I'm not going to do all of the work for you!

I would suggest to next step would be to drill down into the financial statements of each of these companies to make sure there are no nasty surprises waiting for the unwary.

Once again I would like to stress that I am not recommending that you invest in any of the shares listed here (let Hastie group be a warning to you). The analysis above has been superficial at best, focusing on stocks with the best dividend yield. But it does give us a short list upon which we can concentrate our efforts.

2011 Share Floats - What Will 2011 Hold For Investors In IPOs?

With the year now well underway, it's time to turn our attention to what the IPO market might throw our way in 2011. In terms of the number of new issues, last year was an improvement on 2009. Will 2011 be a better year again for investors in Australian share floats?

2010 saw 96 new listings worth a total of $7.5 billion. The monster float of the year was QR National. And despite some investor doubt in the run-up to the QRN share offer, the share price has actually performed fairly well. Shares are trading at $2.80 as I write this, which is a reasonable premium to the $2.45 paid by retail investors. Of course such short term price movement is likely to be driven more by sentiment than by fundamentals. The real test for QR National will be the next couple of years operating results.

Looking ahead, the first major float of 2011 is rumoured to be Nine Entertainment Co. This IPO could be worth as much as $5 billion. Nine Entertainment Co is the new name for the PBL Media assets bought by private equity CVC Capital Partners in 2007.

Here is the blurb from the home page of Nine Entertainment Co website:

We are Australia's most diversified entertainment company. Our assets include the Nine Network Australia, ACP Magazines, Ticketek, Acer Arena and majority interests in carsales.com, a 50% interest in ninemsn as well as interests in the Australian News Channel (Sky News).

While it looks like there are some quality businesses within the group, the attractiveness of this float will depend upon pricing and the debt levels held by the entity which eventually lists.

Another interesting share float in 2011 might be Intrepid Travel. Intrepid Travel provides adventure travel services. While the company is not as large as some of the other floats which might come along this year, it does have quite a strong brand. The business is was started 21 years ago. It made a pre-tax profit of $10 million from revenues of about $120 million.

Ascendia Retail is another name which keeps doing the rounds. This group contains Rebel Sport and was rumoured to be a starter for an IPO last year. However, given the negative sentiment toward listed retail companies right now, owner Archer Capital might be inclined to hold on until more positive signs emerge from this sector of the market. It's worth noting that Archer also owns MYOB and iNova Pharmaceuticals, both of which I presume it would be looking to sell out of at some stage.

Other retailers currently held by private equity firms which may eventually come back onto the market include Repco (owned by Unitas Capital) and Colorado Group (owned by Affinity Equity Partners) although according to this article in The Australian, Colorado may be some way off being in a position for a public offering.

Two other companies rumoured to be considering their IPO options are Link Market Services KKR's Seven Media Group, although these may end up happening in 2012 or beyond.