Earn Extra Money While You Hold a Stock
Let’s say you’ve owned Alphabet, Inc. (Google) shares for 10 years and have no plans to sell anytime soon. You like the fact that the shares have generally gone up over time, but they pay no dividend and you’d like to receive some income without having to sell the shares.
Or maybe you own shares of Coca-Cola which do pay a dividend, but you want a little more. A number of brokerages like Fidelity, Charles Schwab, and Interactive Brokers, provide their customers with a way to earn income through securities lending.
Basically, you agree to loan your shares to the brokerage, who it turn loans the shares to short sellers so that they can bet on the stock going down. The brokerage splits the interest with you.
Which Securities Can You Lend?
You can generally lend US common stocks, ETFs, preferred stocks, and corporate bonds through these programs.
However, just because you are willing to lend, doesn’t mean that the brokerages are going to always have willing borrowers.
The shares you are lending need to be ones that other investors want to short; you can find a list of the most shorted stocks in this Wall Street Journal Short Interest List.
While the SPDR S&P 500 ETF (NYSE:SPY) is on the list, a lot of the individual company names on the list such as J.C. Penney, Rite Aid, General Electric or CenturyLink are facing strategic challenges or have heavy debt loads.
How Much Money Can You Make by Lending Securities?
The interest rate being paid is generally going to be higher if the stock has a lot of negative sentiment. Instead of a low single digit interest rate, Sears Holding had an insanely high annual interest rate of 50% (“fifty percent!”) to borrow at Interactive Brokers back in 2017 (the company filed for bankruptcy in 2018).
Blue chip stocks like Apple, Bank of America, or Coca-Cola might have an interest rate as low as 0.25%.
Even though the interest paid may not be huge, it is still money for doing nothing.
It doesn’t really take any effort; you just sign up to participate in the program and the brokerage takes it from there. Also, just because the shares are being borrowed doesn’t mean you lose out on the dividends.
If Coca-Cola is paying a 3.5% dividend, you still get that cash paid to you by the share borrower, through the brokerage. The income your receive from securities lending is in addition to the dividends.
Let’s say you owned a REIT that already paid a large dividend, like Washington Real Estate Investment Trust (NYSE:WRE). If the borrow rate at Interactive Brokers is 1.25%, then you have the chance to not only collect the 4+% dividend, but to add an extra 0.625% in securities lending income.
For an investor that had $1 million dollars in WRE shares with no plans of selling, securities lending could add over $500 a month in income.