Here’s an elegant way to donate money from share dividends to charity in perpetuity, from Monevator reader Reza. With this guest article neither Reza nor we at Monevator are saying this is the best way for everybody to donate money to charity. But we do love the thinking behind the ‘donation machine’ concept. Over to Reza…
While reading American Psycho by Bret Easton Ellis, I took a break due to how grim it is. During my break, I began to look into homeless statistics and came across the Crisis website.
Crisis is a charity that directly helps homeless people find a home. It also campaigns for changes to solve homelessness altogether.
After browsing through the Crisis site and learning more, I spotted its investor page. This introduced me to the concept of Social Return on Investment (SROI).
My understanding of SROI is that by donating money, you are making an investment in society that yields dividends and/or savings through a compounding effect.
Crisis and other charities conduct research to provide estimates on the value that a donation makes.
For each £1 you invest, Crisis estimates an impressive SROI of £3.30.
The return on investment here comes from helping people to find homes and providing them with the support they need. This makes it more likely an individual will escape from their homeless circumstances and that ultimately they will start to pay taxes.
Conceiving a ‘machine’ to donate share dividends to charity
It all got me thinking of stocks and shares investments in relation to charities.
I soon hit upon the idea of a set of shares that are dedicated to perpetually creating money for charity. That was something I found very appealing.
How do shares generate money?
When you buy shares you are buying a piece of a business. Some of these businesses distribute cash to shareholders in the form of dividends.
Dividends are typically paid out periodically – usually a few times a year.
Although not all companies distribute dividends, many do.
It’s also important to know that the dividend payout can fluctuate, just like the share price.
Why make a ‘machine’ to donate money?
I believe my idea to automatically donate share dividends to charity could appeal to other Monevator readers for a few reasons.
The machine perpetually generates money
The key benefit is that once you have created your set-up to donate dividends to charity, in theory it should generate money indefinitely.
Share prices go up and down, but British companies are pretty good at paying out increasing dividends over the long-term.
A good way to take advantage of this is through a low-cost ETF that sports a good dividend yield.
When you invest in an ETF, you are buying into a group of companies. For example, if you bought a FTSE 100 ETF, you would be buying a slice of every company in the FTSE 100.
With an ETF you do not rely on a single company to dish out the dividends. Your risk and expected dividends come from many different businesses.
You can build up the machine over time
To make your machine more powerful, you simply add more cash to it.
By periodically adding money and buying more shares, the dividend payout should increase over time. This will mean more cash to donate to charity.
You still have a lump sum if you need it
With my approach, you retain control of your lump sum in a broker’s account. You can call upon this if things go really bad and you need cash.
However, let’s stay positive and go with the plan of never needing to touch it. Hopefully it will continue generating cash for donation for a long while.
The donation machine should grow by itself
Share prices and dividends, in aggregate, have in the past increased over time. So we should find that our machine gets more valuable and generates more cash as the years go by.
Building the core of the machine
Here are the steps involved to get this project off the ground:
1. Open a cheap brokerage account (just for charity donations)
2. Deposit cash into the account
3. Purchase some shares (I chose Vanguard ETFs)
4. Set dividends to be paid to a bank as soon as they arrive
5. Bank transfer that cash over to your chosen charity
My results: One year on
It’s just over a year since I set up my own donation machine.
Although I haven’t yet got everything automated and I’m still involved in the process, it otherwise looks to have been a success.
My chosen ETFs have increased in value by around 12%. And the machine has generated just over £30 in dividends to donate to charity.
The cash from dividends was moved from the brokerage to a bank account and from there I transferred it to Crisis.
If we plug £30 into Crisis’ SROI calculation (£30 * 3.3) it equates to a £99 impact from the donation machine in its first year of operation.
Okay, humble beginnings, but not a bad start. As dividend growth kicks in and I add more funds to the pot, my machine should deliver a larger round of dividends in year two.
Hopefully it will continue to grow from there!
Towards a truly automated donation machine
Currently my donation process is manual.
I take a look at the brokerage account occasionally and check if any cash has been generated. If cash is available I move it to my current account and then I do a bank transfer to the charity.
So the outline of a perpetual donation machine is there. But the implementation is not.
However I have a clear idea of how I can completely automate the entire process.
Here’s what I need to do to assemble a truly automatic solution.
Parts required
In order to automate this, a few things are going to be needed. Namely a broker, a bank account, and of course the charity you wish to donate to.
My bank of choice is Starling. The primary reason for this is that Starling offers something called an Application Programming Interface (API).
With this API, Starling provides a toolkit that enables you to write computer programs that interact with your bank account
Other banks do offer APIs, but where Starling really stands out is that it allows you to make payments – to existing recipients – by using the API.
My broker will be Vanguard Investor and the account would be an ISA.
The key reason for choosing a Vanguard ISA – other than those previously covered by Monevator – is that Vanguard allows dividends to be automatically transferred to a bank account as soon as they are paid.
To find this, look under My profile > Product > Edit > Distribution and then Dividends options.
Surprisingly, this is not a ‘flick of the switch’ option on all brokers.
From my own research, it appears to be completely absent in the AJ Bell YouInvest control panel, for example.
Lloyds and Halifax do have quite flexible automatic payout options – quarterly, annually, or as soon as dividends are paid – but it appears cash can only be automatically paid out if you have a bank account with them.
Finally, you need a charity. My choice for now as I said is Crisis.
I sent a short email to Crisis explaining that I would like to donate by bank transfer. It promptly replied with the details required: account name, number, and sort code.
I am sure other charities would respond the same way.
Assembly
Now we have all the ‘parts’ needed, the next step is putting them together.
The first step is to link the current account with the brokerage account and confirm that it enables both withdrawals and deposits from the current account.
Next, transfer some cash into the brokerage and purchase a fund that distributes dividends.
Set the ‘Distribution and dividends’ option to ‘Pay to My Bank Account’, so as soon as dividends are paid they leave the broker for the bank.
Moving over to the current account, the charity would need to be added as a payment recipient in order that payments can be made.
This setup now allows for dividends to be automatically paid into a new bank account periodically.
All that’s left is to automatically pay the charity when cash is available.
Things now becomes slightly more complex. I will need to write a small computer program that interacts with the Starling bank API balance and payment endpoints.
I won’t go into the nitty-gritty as it’s more important to convey the process itself.
The program needs to:
1) Check if there is cash in the bank account
2) If you do have cash then transfer it to the charity
3) Send a notification that the donation has occurred
Below is some top-level pseudo code – in reality the program would be perhaps a few hundred lines long – showing how it may look.
If balance > 0:
donation_amount = balance
make_payment(charity_account, donation_amount)
send_notification(me)
send_notification(charity)
send_notification(accountant)
This program will need to be carefully tested to check it’s working correctly. Once it looks good, scheduling the program to run daily on a server would be the last step.
With all that done, we would have an automated system that creates and donates money to charity. Wonderful!
A taxing matter
When I discussed this idea with The Investor, one topic he raised was tax relief and how to go about claiming Gift Aid.
This was not something I had considered, but it shouldn’t be a problem.
With Gift Aid, a charity gets an extra 25p for every £1 you have donated (or that it raises from selling your donations).
Making a Gift Aid declaration for the charity to claim with our donation machine could be quite straightforward.
If you’ve ever brought things into a charity shop to donate, you will already be familiar with the routine: “Would you like to do a Gift Aid declaration?”
Doing so takes barely a minute.
Handling Gift Aid could be be a snap in the automated program, too.
You may notice a line in my code above saying:
‘send_notification(charity)’
The idea behind that is to let the charity know you have made a donation with a bank transfer. You could include a Gift Aid confirmation here.
Next steps and final thoughts
There may be other brokers out there offering greater dividend payment flexibility so that the program and/or bank account stages are not needed.
However I have not personally come across one.
I’m hoping to write the automation program in the near future. When I do so I will make the code publicly available.
In the meantime, the businesses in my donation machine’s ETFs are busy ticking away producing the next batch of dividends.
This system provides me with some much-needed structure around the way donations are made.
There is now no question about how much and when to donate to charity because all that is determined by the dividends. It’s also something I look forward to building on.
And of course it’s rewarding to see the cash generated by the dividends being sent towards good causes!
Any comments about this way to donate share dividends to charity are very welcome. Hopefully I can incorporate any suggested improvements in the future.
The Investor again! I love this idea. It may seem a slightly complex way to donate share dividends to charity, but I believe the idea of growing a donation machine over time will appeal to others with the ‘snowball’ mentality, too. The idea of putting more money into my own donation machine whenever I have spare cash and then seeing it grow in earnings power and impact over the years hits the spot for me. As Reza says, the cash is still there if you need it – so unless and until then you could potentially put more money towards charity than you otherwise would with a one-off contribution. You could also end up with a chunky final bequest for your favorite good cause! Please be gentle with our guest author, but otherwise let us know what you think in the comments below.
My experience of Gift Aid (normally goods rather than money, admittedly) is that the declaration is a one-off, and you get a Gift Aid reference number which is used for further donations. I’m sure it would be easy to sort out within the process above. Interesting article – must check out Starling.
I really like this idea, thanks! It’s a clever way of separating out the wealth destined for charity without triggering the fear of needing the cash following an emergency. It helps the charity to get a regular (ish) stream of income to plan with and mean that I get the psychological benefit of giving while I’m still above ground.
For people looking to maximise gift aid and tax efficiency, Charitable Trusts or Charity Accounts might be worth a look. You can fill them when you are paying a high rate of tax and the distribute from them in your own time. Unlike the solution is this article, there is no option to get the cash back.
Of course, when you get to a certain point you can just open a Donor Advised Fund (DAF) and do all the investing (and advised giving) post-gift aid. If you’re happy with your money being looked after by a Christian organisation who may reject requests to give to charities which don’t match their ethos you need around £25k to open one with Stewardship (https://www.stewardship.org.uk/). If you don’t like that idea, you need about £250k to open one with the National Philanthropic Trust (https://www.nptuk.org/). There may be other options available, those are merely the ones I know about.
There are some restrictions on the funds/shares you can invest in, but they’re generally along the lines of whether those funds align with the moral imperatives of the organisation that you give the money to and taking your advice on where you’d like the money to be given to. After all, it doesn’t really make sense to invest in arms to generate money to give to aid organisations.
The key point is that in exchange for the government giving all the tax back, you’re giving money to the charity, making it theirs in perpetuity. In exchange the charity agree they’ll listen to your advice on where that money should be given to, but you can’t make them if they don’t like your advice – it’s their money after all.
Interesting idea. I don’t see the true benefit of segregating the assets which are sweated and then the yield goes to charity vs just donating to charity every so often, but each to their own. Also seems a waste of an ISA account in this case. To add, remember that in addition to gift aid for the charity, if you’re a higher or additional rate income tax payer you can increase your basic rate band to get further relief.
Interesting idea! For the ultimate in donation automation though, do consider if your employer runs a Give as You Earn scheme. I donate from my paycheck with no fuss. This also allows higher rate payers to get the full tax rebate on donations without submitting a self assessment.
I’m surprised that Lloyds and Halifax will not pay out dividends to a bank account not with them. I have a general investment account with IWeb (part of the same group) and they pay out dividends to my Barclays current account without any problem.
@Jack (5) Before I retired I used Give As You Earn for many years. It can work well, but I found that each time my employer changed its payroll provider (a not infrequent event) payments to the charity account would go missing, usually because the reference had been missed off. Once I had chased this up, they had to be manually reconciled by the GAYE provider. I think this happened on three separate occasions altogether, and was always difficult to get corrected, so I eventually reluctantly gave up payroll giving and reverted to manual donations.
Interesting idea, however I wouldn’t want to lose my ISA allowance to this end. I use Charities Aid Foundation which is excellent, previously it was linked to the Give As You Earn Scheme which is also a good scheme especially if you are nearing a tax band hike. Now, I pay into my CAF account on years when dividends are high particularly to avoid the tax cliff edge. No payments in this year!
It sounds like human time is still required on the charity side to set up the bank details and handle gift aid notifications.
Perhaps manually paying them once a year (e.g. debit card payment with gift aid checkbox on their website) is more practical for the charity than dealing with frequent small sums sent via this semi-automated way?
Interesting idea – have you thought of approaching Starling to see if they would either promote the idea or (better still) consider setting up some sort of automated giving mechanism for their customers?
Like others commenting, I would not want to give up a dedicated ISA account for this and (not for me but possibly for others looking at larger amounts), using up CGT might be a consideration.
Ultimately, if it encourages more donations to good causes (while still protecting capital of the donor) then it’s a great idea.
When my python and money newsletters merge…
Very interesting, as this is something I’ve considered doing myself in the future.
At the moment I do make monthly donations both direct to charities themselves but also paying into a CAF charity account, which automatically claims the gift aid. I can then donate freely from the CAF account to other charities.
I guess there’s nothing to stop me from starting to build up a donation fund now (and I could pay such dividends into my CAF account for later distribution) – which Vanguard ETFs did you choose to generate your income?
If you can get over 100% SROI, with future tax revenues, surely the taxman should consider funding these charities…
I believe on that note that multiple charities are taxpayer funded anyway so even if you avoid everything except VAT your investments do help charity anyway
Also the taxman pays for welfare, healthcare, etc – many kind or necessary things – you could consider hmrc itself to be a form if charity, and that simply avoiding less tax is an act of charity itself.
Also I must propose that capitalism is what makes our countries richer and the lives of everyone better – for profit companies do supply things people want/need, even if boring or undramatic – maybe simply keeping it in accumulation funds is truely the most moral thing we can do to supply the most of what people value and to spread development through the world
A possible idea for those lacking the programming skills to automate the process:
If you create a standing order, from your bank account, to pay your chosen charity say, £100 each month on a fixed date, the following paths could be taken:
1. Your balance is =£100, and your standing order to charity will be paid.
I know what you are thinking. Disadvantages with above: Obviously, if you have a bumper dividend season (say a payout of £300), it will take 3 months to pay it out (in 3 chunks, rather than 1). Also, if you have a poor dividend season (say £90), then that £90 might languish in your account for some time (earning no interest?). But… there are solutions to these problems:
You could setup multiple ‘stepped’ standing orders at different amounts, one day after the next.
e.g. Div Period + Day 1 – £500, Day 2 – £400, Day 3 – £300, Day 2 – £200, Day 1 – £100
(or these could simply be monthly, if you don’t know the typical dividend frequency).
If it fails Day 1 because of insufficient funds, it will try a lower figure on day 2, else a further lower figure on Day 3 etc – until it is able to make a payment, or gives up due to your balance being < £100. If it succeeds on day 1 at the higher payment, then obviously the subsequent day 2-5 payments will fail, due to insufficient funds.
Obviously you miss out on your fancy email, but hey, you could just do that manually once a year by going through your bank statement (as you'll need to for your tax return anyway).
The key here is to set up enough standing orders at the right amounts, stepping down each day, to cover the desired behavior, and ensure that a 'failed' standing order doesn't produce a bad outcome (e.g. bank fees/charges/overdraft). In most cases, I do believe the bank simply skips it until the next period.
Like Arabella+Tullo I use the Charities Aid Foundation (CAF).
I have a monthly DD into my CAF charity account, where the Gift Aid tax uplift is automatically added (solves the issue BerkshirePat raises).
I find this the simplest and most effective way of supporting vital charities.
https://www.cafonline.org/my-personal-giving/plan-your-giving/individual-giving-account
The charity I support through CAF is the Child Poverty Action Group – https://cpag.org.uk/about-cpag/our-impact/our-impact
High SROI ratios can be found in charities that are staff by volunteers as well as paid staff. A good example would be your local Citizens Advice.
As an example (one of around 300 local offices):
https://www.coventrycitizensadvice.org.uk/
Which states “Every £1 invested generates £11 benefit to the client. “
Excellent article, Reza! Thanks so much for sharing your ideas, maybe one day this will become a common practiced method
@BerkshirePat Sounds good, I haven’t noticed a code before but yes, as you said that can no doubt be added into an automated email or something along those lines.
@Playing with Fire You’ve pretty much summed up the reasons for me right there in the first paragraph :). Charitable Trusts or Charity Accounts sound interesting, I’ll have a look into to get an overview.
@Will Not heard of stewardship.org.uk or nptuk but I’ll have a read. “doesn’t really make sense to invest in arms to generate money to give to aid organizations” is a fair point, I know there are some ethical focused ETF’s (one of the nest pensions is labelled an ethical fund) but I haven’t spotted one offered by vanguard in their UK investor account.
@Genghis Yes absolutely, the the separation certainly may not be needed for some, but the key benefit I’ve personally found is that the separation means ‘these funds are dedicated to making income for charity and anything that comes out of this account, goes to charity’. For me it removes the umm and arring about how much and when to donate and results in consistent donations rather than going long periods without donating.
@Jack Thanks, hmm, I’ve not been made aware of one at work but I’ll look into it. Certainly could be a no hassle approach for those who prefer to just do a set amount/percentage each month.
@DavidV Yeah, it’s really weird, I actually asked them about this because I was surprised and they confirmed this. I think Lloyds and Halifax run the same software as it looks and behaves pretty much the same. Maybe IWeb run a different system.
@Arabella+Tullo Indeed, that is a flaw but it should work with a standard vanguard investor account too which would get around the under utilization of the ISA.
@Stefan That’s how I do it at the moment. The human side in theory would only needed to be done once (bank details and gift aid notifications), then the automated side would take care of the checks and payments ideally by generating a gift aid form too.
@Stuart Moore Many thanks, I’ll write up something and email the media dept as they may be interested. Yes, definitely. The ISA part is a sort of ‘idealized’ method in the sense that dividends and gains would be sheltered but it should work with a standard investor account too.
@Alex Haha, guess you spotted that colon after the if statement 🙂
@weenie Thanks, not heard of CAF before, I’ll check it out. I personally used VUKE and VMID but of course, that is by no means a recommendation :).
@Matthew In my opinion a excellent and well articulated point on tax there. Is it worth getting hung up on tax when taking this into consideration.
@Howard Sorry, I’ll need to read this one with a fresh head tomorrow and get back to you 🙂
@Holt Thanks for sharing that info about how you invest in CAF. Again, something I’ll need to read up on. Wow, that SROI’s is considerably higher than CRISIS. I wonder why it’s so different.
My post was truncated in the middle for some reason (so didn’t read especially well), but hopefully you still get the idea. Just set up standing orders in depreciating amounts and it’s all then automated. Easy. Contact me if you still don’t understand it and I’ll explain. The bank will skip a payment if there are insufficient funds.
@Howard Makes sense to me and certainly simplifies the whole process. I suppose the key thing is that as long as the direct debit fails ‘gracefully’ in the sense that there are no charges incurred by the failed direct debit if there are no funds it would certainly be a more simple approach. Not something I considered because I (probably wrongly) though if a direct debit fails, the bank is going to hit you with a charge or fire off some sort of alert that a direct debit failed. The alternating amounts is a nice idea too and certainly would help with those bumper payouts – better off with the charity than sitting around doing nothing in the account waiting to be paid out. Many thanks for sharing this :).
@RS: Standing Order…. NOT a direct debit.
@Howard My mistake, if the bank simply skips it, then all seems fine.
I’ve read the Starling API’s documents, it appears that you CANNOT make payments using their APIs unless you are a registered third party provider with regulatory approval. It looks like a dead end to me.
@RS Hi Reza, I am currently looking to implement this structure and was wondering if you could reach out to me for a call to discuss?
I just had the same idea! Well executed 🙂 I wonder about the feasibility of setting up a charity company to do the exact same but make it so easy that anyone can plug in MyDividendGiver to their favorite brokerage platform. Of course, not so simple, but curious about your opinion based on your experience! Thanks!