DRIPs or DRiPs (Dividend Reinvestment Plans) are one of my favourite ways to grow my investment portfolio. There are many upsides to DRIPping but before I get to that and the DRIPs the DRIPpers DRIP let’s rewind a bit. Let’s understand the essence of this powerful investment tool.
What is it? How does it work?
The essence of DRIPping is this: you can reinvest your dividends so they automatically buy additional shares of a company.
There are different types of DRIPs. Discount and full-service brokers offer “synthetic” dividend reinvestment plans which are the easiest to set up and manage. All you need to do is simply call your discount broker and ask to have your security (or securities) enrolled in the DRIP plan. DRIPs can be for dividend stocks or Exchange Traded Funds (ETFs) or mutual funds (if you really own those). Regarding stocks, not all companies have a DRIP plan but your broker will tell you which ones do and don’t. For the most part, all major blue-chip Canadian and U.S. stocks offer “synthetic” DRIPs.
“Full” DRIPs are a little more cumbersome to set up for the purposes of this post, we’ll focus on stock DRIPs. First, you have to own at least one share of a company. Next, you need to contact the company’s transfer agent – the organization that keeps track of the shareholder records – and enroll your shares in the plan. Next, you need to complete and submit some paperwork, and wait a few weeks for all the transactions to occur. There are many steps involved in setting up a “full” stock DRIP so to help you I’ve posted for many months now, a series of posts on my site. The hassles of setting up a traditional or “full” DRIP annoy some investors. Devout DRIP enthusiasts will tell you there’s no better way to invest. This is because “full” DRIPs allow you to purchase fractional stock shares with the transfer agents, so all of your dividends including the partial shares are recycled into more stock of the company. As well, “full” DRIPs allow you to purchase stock shares commission-free. Instead of buying the stock through your discount broker, you can simply send a cheque (remember those?) to the transfer agent and they will do all the work for you. Some companies are so excited to have you in their DRIP plan, they will offer you a discount on shares purchased – honest. “Full” DRIPs can be pretty amazing.
Benefits of DRIPs
Now you know the premise of DRIPping, and some the efforts required to get it set up, you can enjoy the many pleasures of being a DRIPper:
• DRIPs can provide dollar-cost averaging.
• Most full and synthetic DRIPs have no commission fees.
• Full and synthetic DRIPs are always working so you don’t have to someday, taking advantage of compounding your money.
• You can “turn off” your DRIPs whenever you want the income instead.
• DRIPs can help take the emotion out of investing.
Not everything comes up roses with DRIPs. With DRIPs you cannot control the price or timing of the dividend reinvestment purchase, you might be buying more shares when the stock price is high. With a synthetic DRIP, you need enough dividend income to buy one full share otherwise the cash will be paid out to you. Some full DRIPs have minimum purchase requirements. However, the upsides are pretty darn good and tend to trump the downsides which is why when you look at the DRIPs the DRIPpers DRIP, you’ll notice some familiar companies that offer full dividend reinvestment plans and why so many investors want to take advantage of them – as often as they can.
Here are the top companies the DRIPpers DRIP for 2012, courtesy of The DRIP Investing Resource Centre:
Bank of Nova Scotia (BNS) – paid dividends every year since 1832.
Bank of Montreal (BMO) – paid dividends every year since 1829.
Enbridge (ENB) – paid dividends for almost 60 years.
TransCanada Corporation (TRP) – paid dividends since at least 2000.
Johnson & Johnson (JNJ:US) – paid increasing dividends for 50 consecutive years.
Fortis (FTS) – paid dividends for over 30 years.
RioCan Real Estate Investment Trust (REI.UN) – paid steady distributions for almost 20 years.
Bell Canada Enterprises (BCE) – paid dividends since 1983.
PepsiCo – paid dividends since 1952.
TransAlta (TA) – has not missed a quarterly dividend payment since 1956.
For more reading:
What do you make of this list?