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