There’s do-it-yourself investing and then there’s really do-it-yourself investing. I’d definitely put full dividend reinvestment plans (DRIPs) that include share purchase plans (SPPs) in the latter category.
Thanks to my friend Dividend Ninja for encouraging me to post this content, and for support of my dividend-investing journey in general, Getting started with DRIPs and SPPs is going to be a four-part series on his site and mine. In this series, I’ll provide you with a comprehensive look at full DRIPs with SPPs as they apply to Canadian dividend-paying stocks.
Part 1 is already posted on Dividend Ninja.
Part 2 is here on my blog today.
Part 3 will be back on Ninja’s site and in the cleanup position, Part 4 will be on my blog.
Let’s pick up where we left off, shall we?
Question to My Own Advisor:
How can I get started with full DRIPs?
The first thing you need to know is not all companies offer full dividend reinvestment plans (DRIPs) that include share purchase plans (SPPs), but the ones that do, pay dividends and are arguably some of best companies to own in Canada. Most big Canadian banks (like Bank on Montreal for example) offer a full DRIP with SPP and many of those banks have been paying dividends for over 150 years! Enbridge offers a full DRIP and they’ve got a tremendous history of paying and increasing dividends. Fortis, Emera and BCE offer full DRIPs with SPPs and most of these companies are part of our pension plans as well as core holdings in many Canadian equity mutual funds. Even Tim Hortons now offers a DRIP! Who doesn’t love Tims? I’ll provide you with some resources later on, so you know what companies offer full DRIPs with SPPs.
To get started in direct stock ownership with company transfer agents, you have a few options…
Option 1 – Know somebody or find somebody.
One way to get your first share is to ask someone you know who has a full DRIP with SPP on the go, with the company you want, and request them to transfer a company share to you. This can be done at no charge to the current shareholder but you’ll need to pay that investor for your share. Usually a small gratuity or courtesy fee (about $10 or so) also goes on top of the stock value for their efforts in helping you out.
If you don’t know anyone, then you can try something called a Share Exchange Board. There are folks who are shareholders with full DRIPs and SPPs running, who are often willing to sell one of their shares. The same gratuity (usually $10 or so) will apply if these investors are willing to transfer a company share to you.
Here are a few popular Share Exchange Boards:
DirectInvesting.com, associated with Moneypaper, but really geared for U.S. stocks.
Alternatively, and one of the best solutions, is to find a DRIP Club in your area. Don’t know where to find them? Well, instead of “Googling it” Jon who runs an outstanding site dedicated to DRIPping called Canadian DRIP Primer has already done some work for you. Actually, lots of work for you. Thanks Jon!
When you find your DRIP club, you can ask someone in the Club if they would be willing to transfer one of their company shares to you. You would need to pay them the share value and small gratuity for the effort (again, about $10 or so). It’s probably best to execute this option in person, since some minor paperwork is required for you to complete, to take ownership of the share. Don’t worry, it’s not like completing your taxes! The paperwork is quite painless and the seller of the share will know what to do, they’ll bring you your share and something called a Securities Transfer Form.
Any of these tactics above are an option, and they are an excellent way for someone who doesn’t have an online discount brokerage account, to get started with full DRIPs and SPPs. Why? Your discount broker will likely charge you fees if you don’t have enough assets in this account.
Option 2 – Pooled purchase/group buy.
Another way to get your first share is to be part of a pooled purchase or group buy. This is where one individual (who is usually an existing shareholder) buys a block of shares in a full DRIP eligible company and then has the transfer agent distribute shares into new accounts for everyone else in the group. I’ve heard of small groups of people doing this, groups of 10 or so in Ottawa where I live but I’ve heard of larger groups doing this.
Option 3 – Do-it-yourself via initial stock purchase in your own discount brokerage account.
I’m not against option 1 or 2 above but I started my own foray into DRIPping a few years ago with this option, using my own discount brokerage account. I felt it was safer (rightly or wrongly) because I was in control of all the transactions but more importantly I already had a discount brokerage account I could use.
Step 1 – Research DRIP plans and determine the company you want
Like I mentioned above, not all companies offer full DRIPs with SPPs. Luckily for us, there are some great companies that do. Instead of checking multiple company websites to find if your favourite company offers a full DRIP with SPP some very fine folks (and DRIPpers) like Jon (the first link below) and Ken (the second link below) run awesome websites to help you and I out. Check out their sites for listings of eligible DRIP companies.
When you visit both of their sites, amongst the other great material, focus on companies that have “Y” (meaning “Yes”) in both columns for DRIP and SPP when you look at their respective lists of companies that offer DRIPs. Why? Remember the biggest power of full DRIPs comes with companies that offer share purchase plans, so you can invest small amounts over time, at your own pace, with those fractional shares reinvested. If you enrol for a DRIP plan, but the company doesn’t offer a SPP, then you won’t be able to buy additional shares at will.
Your research shouldn’t stop there. Just because a company offers a full DRIP with SPP doesn’t mean you should automatically invest in it. Direct stock ownership always comes with risks. You need to understand what company you are buying and why you are buying it; understand what you’re investing in at all times. Would you buy a new car without a test drive? Would you buy a new TV without looking at the picture? Would you purchase a plane ticket without knowing what you’ll do when you get there? If you answered “yes” to any of these questions, then dividend investing and DRIPping isn’t really for you. Taking risks with your investments is not really aligned with the DRIP and SPP investor, who often has a very a long-term view. You need to be in for the long-haul with DRIPs, years not months, otherwise, why start all this work in the first place?
At minimum, dividend-investors should be looking at…
- dividend history
- dividend frequency
- dividend growth
- dividend yield
- dividend payout ratio
- company cash flow
- company profits
Beyond research in the company you’d like to own, you should read the company DRIP Circular or Plan Brochure which is usually available online from the company’s website or from their transfer agent like Computershare or Canadian Stock Transfer Company.
If you want to know what I mean and what you should be reading as part of your homework, check out this one from Bank on Montreal from the Computershare site.
These Brochures tend to be rather lengthy but readable
In my next post, Part 3 of Getting started with DRIPs and SPPs on the Ninja’s site, I’m going to continue sharing the process I followed to start DRIPping, which included buying my first share via my discount brokerage account, ordering that stock in certificated form and getting the transfer agent paperwork started to enrol the stock in the full DRIP with SPP. I look forward to sharing those details with you!
So readers, I’d like to know…
Have you heard of dividend reinvestment plans (DRIPs)?
What are your thoughts about reinvesting dividends? Have you done it? Are you DRIPping stocks now with company transfer agents?
Are you enjoying these posts?
Want to continue following this series, click here to read Part 3 of Getting started with DRIPs and SPPs on Dividend Ninja.