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Charles Schwab | Securities Lending Fully Paid Program (SLFP) | Passive Income | Dividend Portfolio - YouTube
Channel: Hidden Freedom
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nobody Dave here hidden freedom
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investing and today we're gonna talk
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about Schwab's security lending fully
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paid program or SLFP that's the acronym
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for it anyway so I wanted to look into
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this program after watching a video from
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ez wealth building and she was basically
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lending out her shares and getting
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anywhere from 50 to you know 100 to $20
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a month just from lending her shares out
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know I had heard of it before from
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Interactive Brokers they had a program
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as well called enhanced share program or
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something like that I had never used it
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with Interactive Brokers so it's kind of
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you know intrigued when I saw etrade had
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the option so she's using e trade and
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I'm not so that's when I started to dig
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in to see whether or not WOB offered
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something like that so it's going to
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take a look at her channel if you've
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never been there before and going leave
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a comment let her know that you found
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her channel for mine so let's go ahead
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and take a look at my portfolio real
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quick here so this is my dividend
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portfolio and it was kind of thicker and
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hey you know I got these shares in here
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you know all these great stocks right
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and why not just have some extra money
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that can be generated off of these
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shares and you know I already knew about
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the program I knew it existed I just
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didn't know if swabb offered it so
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that's what we're gonna talk about today
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and you know figure out what I found out
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from Schwab so let's go ahead and dig in
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so after doing some diggin that's what I
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came up with Schwab security lending
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fully paid programs so I was really
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excited when I came across the program
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until I got to the fine print so well
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let's go ahead and see what we found out
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when you enroll in the securities
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lending fully paid program you can
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receive monthly income for lending
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you're fully paid securities to Schwab
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you can sell Loan securities and end
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loans at any time there's no cost for
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you to participate in the program well
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that sounds perfect doesn't it and
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you're probably thinking what's the
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catch well there really is no catch but
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it's not you know there's not a catch
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there's some downfalls not every broker
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has
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these downfalls but let's kind of dig in
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here a little bit here at the benefits
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can be considerable typically securities
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remain in an account waiting possible
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share price to increase in capital gains
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that means that you can still make money
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off a capital gains and for share prices
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increases and all that so just just like
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you own shares now in your brokerage
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account if the stock goes up you're
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gonna make money well you're still gonna
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make money off your shares if the stock
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goes up okay in addition to you know the
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capital gains and all that these shares
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being enrolled in SLFP program you're
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qualified shares get a chance to work
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even harder so Schwab borrows the shares
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and lends them to other clients or
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financial institutions securities are
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usually borrowed to facilitate a short
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sale in exchange for lending these
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shares you're paying income in general
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the greater the demand for the
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securities the higher your potential
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income so if you're not familiar when
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you short a stock you're essentially
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borrowing those shares all right and
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then what you do is you end up buying a
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back theoretically at a cheaper price
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and then you keep the difference that's
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what's share that's what shorting a
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stock is all right so and you know some
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brokers like Interactive Brokers for
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example if it's a very popular stock
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that's being shorted it might be very
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difficult to find shares to even borrow
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so Interactive Brokers has an option
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right there he's right click on it and
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tell you how many shares even available
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to borrow so I don't know if every
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broker has that but so that's what
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they're gonna be doing with these
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they're pretty much just gonna be
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lending them out so they can be pretty
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shorted but there was a couple of
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caveats we want to get to but you know
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as far as I get dividend portfolio is
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concerned you know these stocks in here
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are probably not really good short
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candidates you know what I mean so I
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don't you don't see a Tesla in here
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right so I just don't think a lot of
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these stocks are gonna be a real good
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candidate for the program now there
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could be some you know issues you know
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Wells Fargo and they have that account
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issue or whatever I'm sure people are
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shortened it or something so there is
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times where something could be loaned
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out I think and you could make some
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extra income for
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so but in general I think these are
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pretty safe stocks in my portfolio I'm
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not gonna scroll all the way down some
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of the bottom down here but they are
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very stable stocks in my portfolio so
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but you know I mean if the potential is
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there to make a lot of extra income then
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that's great so but let's get to a
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couple of caveats so unlike the broader
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markets for common stocks the market for
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security lending is relatively small
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however Schwab has the expertise and
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technology to connect those who have the
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securities with those who need them
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giving you an opportunity to earn more
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on your securities all right well it
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sounds great
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what's the catch how the program works
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because the security investor Protection
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corporation s IPC may not cover your
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security while Schwab is borrowing them
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you will receive collateral for your
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loans this protects you in case there is
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termination event such as an unlikely
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event of swab filing for bankruptcy
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protection so if you're not familiar
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with the SPC is it protects you if your
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broker goes bankrupt basically so and
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I've talked about it in other videos you
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want to make sure you're always in a
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broker that's you know falls of
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regulations in the US or I don't know
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what country you live in but you want to
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make sure you're covered if the broker
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goes bankrupt so this kind of sounds bad
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because you're not you may not be
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protected so well Schwab has a solution
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for that so they basically essentially
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an open account when you sign the
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agreement all that they open an account
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and it's specifically just for this
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program and if you're lending out say
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$10,000 in stock then they essentially
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deposit about $10,000 into that account
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that's the collateral so and that's what
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this document is here cash collateral
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for securities lending fully paid
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program so that's what this documents
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all abouts questions about that whole
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particular portion about lending out and
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being protected by the S IPC so this is
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great because look at this yes cash
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collateral qualifies for the Schwab Bank
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sweep feature which means you're going
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to earn interest on that money
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sitting in there so if you're lending
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out $10,000 in stock and then you're
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gonna still your an earn interest on
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that $10,000 the bad news is and I know
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what you're thinking you're probably
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thinking oh I could just meal invest
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that in a more stock you know or I could
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take it out and spend it on a Louis
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Vuitton no you cannot so the only time
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that that money can be taken out is if
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there is you know a an issue with the
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agreement so like a termination in the
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agreement you know due to bankruptcy or
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something like that so that is not yours
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unless there is a bankruptcy or
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something like that so how is the cash
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collateral protected cash collateral
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qualifies for the bank sweep feature
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fund swept to Schwab's Bank as part of
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this sweet feature are covered by FDIC
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insurance up to two and fifty thousand
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dollars when aggregated with other with
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all other deposits held by the client or
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same capacity as Schwab Bank so that's
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typical FDIC covered up to 250 I think
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even some up to a five hundred thousand
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if you're you know the big account
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something you may have to calm up but
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that's pretty standard
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so si p.s.i PC and FDIC is always
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something you should be checking for
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when you open a new brokerage so your
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cash is covered by FDIC in this case
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here does the value of the collateral
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change with the value of the securities
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the amount of cash collateral is
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adjusted daily to 102 percent of the
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value of the securities on loan to
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Schwab Schwab provides an additional two
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percent of collateral to help account
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for intraday fluctuations in the value
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of the securities on loan so you're
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pretty much covered there I'm not
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worried about the class cash collateral
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I'm not worried about you know them
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going bankrupt or FDIC it sounds like
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I'm covered from that aspect so you're
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probably thinking what is the other
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catch so there is a catch and at least
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in my situation it could be for other
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situations as well so before we look at
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that let's look at the process here we
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just basically can complete this loan
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agreement enrollment form swap creates a
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new supplemental brokerage account for
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you and that's what I was talking about
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they create that separate account and
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that's where they deposit the collateral
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and all that
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Schwab makes arraignment for your
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collateral the securities included in
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the SLFP program are Moo
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moved into your supplemental account
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Schwab ball securities from your
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supplemental account Schwab pays you an
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agreed-upon loan interest rate you'll
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receive monthly statements for your
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supplemental account you'll be asked to
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confirm your loan on the quarterly basis
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pursuant to regulation so there's a
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little fine print here and this is a
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little bit about what I'm talking about
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as far as the caveat so you're still
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thinking well can I sell my stock if
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there's a market downturn yes you can
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there's no it just acts there's no
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difference from that perspective you're
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just you know loaning them out you're
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gonna get money for that to loan them
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out you're still going to get in the
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capital appreciation you can still sell
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them anytime you want and you're still
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gonna get dividends with a catch income
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is calculated daily based on the closing
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price of the loan shares on a 360 day
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year income is credited directly to your
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swab account on a monthly basis share
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price and interest rates may fluctuate
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based on market conditions which will
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affect potential earnings income is
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reported as other income in box 3 and
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IRS Form tenon and mystic for taxable
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accounts now if you note from the 1099
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mystic and then you're gonna get
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familiar with it please take a moment to
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go ahead and hit that like button
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subscribe and set that bail notification
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interest rates used to calculate
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earnings are subject to change without
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prior notice so tonight a mystic is
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essentially you know if you did like
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contractor work something like that they
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could pay you on a 1099 mystic it is not
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1099 div it's not 1099 int all right so
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it's a 10-9 mystic which it means you're
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had like some other income from you know
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from doing some work and they paid you
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on a 1099 so mystic I've gotten a couple
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of those for various things I've done
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over the years but so that is a slight
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issue right here alright so and this is
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what we're talking about tax
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consequences all right so instead of
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actual dividends you will receive
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substitute payments in lieu of dividends
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pil this may have tax consequences
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because pil may not
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be entitled to the same tax treatment as
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many have been applied to the dividend
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payment so if you're not familiar a
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qualified dividend you get that 15%
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unless you're in a really really really
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high tax bracket you might have to pay
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50 20 percent but in in most cases
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you're gonna pay 15% on your dividend
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your qualified dividend tax swab is not
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required to compensate you for any
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differential tax treatment between
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dividends and pls that's the gotcha
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right there so if you're doing a
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dividend portfolio like I am here my
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dividend portfolio here I mean this
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every one of these stocks in here pay a
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dividend so I want to make sure every
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one of these qualified dividends other
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than the Realty income is you know
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treated in such a way that I'm paying
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15% on it I don't want to deal with pil
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alright so that's the big gotcha in my
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opinion so I'm not worried about sa PC
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protection I'm not worried about a loss
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of voting rights maybe some are but I'm
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not during the term of the loan titles
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and securities it's transferred to
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Schwab providing Schwab with all instant
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incidents of ownership including the
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right to vote on corporate actions and
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the right to transfer their loan
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securities to other so yeah I don't care
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about that I do care about the tax
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consequences market risk I'm not worried
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about because it's gonna act exactly the
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same you can still sell it there's no
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difference there so so this is Schwab's
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plan for lending out the particular
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shares now if you have a portfolio
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that's not full of dividend payers like
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this maybe you're in some larger stocks
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you know I mean like Tesla is a really
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good example that you could use this
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program on because it's a highly shorted
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stock it's kind of a speculative stock
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so if you have a lot of speckle story
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illegal cannon to generate some extra
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income so and they don't pay dividends I
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would probably recommend not doing this
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program with a dividend Payne company or
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stocks now with that said make sure you
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check with your brokerage to make sure
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that you know their particular program
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it works like swabs because some brokers
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will actually try to avoid X dividend
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date and in the program so Schwab
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doesn't appear to do that they don't
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mention anywhere that they do that but
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some brokerages will essentially you
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know not loan those shares out during
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ex-dividend times so that's kind of cool
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but unfortunately it doesn't look like
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Schwab does that so with that I think
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that's it with this if they you know if
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I find out anything else with this
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program or I might call them up and find
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out you know if this can work in a
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tax-deferred account or something like
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that and you get kind of the rules and
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regulations on a tax-deferred account I
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don't even know if it's available on a
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text evert account so but we'll find out
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so with that go ahead and leave me a
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comment below if you need you know
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questions comments are concerned go
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ahead and LIKE and subscribe and we'll
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see you next video thanks for watching
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