Sometime in 2020 one of my brokers, Ally, sent me an email asking me if I’d like to earn a little extra money by lending my stocks to short sellers. As a fan of making extra money I obliged and thought nothing of it. Fast forward to January 2021 and I checked my account’s cash balance and noticed it was a bit higher than I would have expected given that I typically go broke investing.
So how does Fully Paid Securities Lending work?
Let’s cover margin lending first. Margin lending is when your shares are borrowed by other investors either to sell short or increase a position beyond cash available to the other investor. Sometimes, due to events like increased short selling, limited supply or corporate events, it becomes more difficult to borrow against certain securities. To fulfill demand, brokers need participants who are willing to have their shares borrowed. Being enrolled in a program like this allows brokers to do this automatically and programmatically instead of having to search the market for willing shareholders.
How are you Compensated with Fully Paid Securities Lending?
This depends on your broker, but Ally provides a monthly cash rebate. In my case it is about a 0.66% annualized rate based on the stocks in my portfolio. But that is 0.66% more than I would have received and I take on effectively no more risk. If you have a portfolio of stocks that have a high short interest, you may receive more income. Ally simply compensates me for being a participant in the program where they can lend at their relatively high margin loan rates. Fidelity has a higher theoretical rate, but I personally hate their User Experience.
None of the following is tax advice, consult your accountant. From my understanding of the program it is relatively disadvantageous to use this program with dividend stocks. That is because the broker has “borrowed” the stocks and given you collateral. Dividends accrued are sent to the broker and the broker reimburses you in cash. That cash is distributed to you as normal income vs qualified or returns of capital.
For this reason, to me it makes a lot of sense to use Fully Paid Securities lending in a growth stock portfolio in a tax advantaged account. For whatever reason growth stocks garner a lot of short interest so there is significant demand for margin lending. If you do have a taxable account I could also see this as a way to generate income without selling stock, writing covered calls or selling covered puts. It won’t be a lot of income, but it is income nonetheless.
Is Fully Paid Securities Lending Right For You?
Overall for me, it is a cool way to generate a little extra income on my SaaS stock portfolio in my IRA. Since I’m generally fully invested I plan on reinvesting the proceeds in more SaaS stocks as opportunities arise. Let me know in the comments if you are taking advantage of this program and if I’ve missed anything!