DRIPs

February 21st, 2013

Want a quick DRIP Primer?

A DRIP is an acronym for Dividend ReInvestment Plan.

Companies use dividends to pass on their profits directly to shareholders. Many stable companies pay a dividend. Most often, the dividend comes in the form of cash: a company will pay a small percentage of its profits to the owner of each share of stock owned. However, it is not unheard of for companies to pay dividends in the form of stock.

Dividend ReInvestment Plans can help you when the market goes up and when the market goes down. You can read more about that below under the upside of DRIPs.

There are different types

Discount and full-service brokers offer “synthetic” dividend reinvestment plans (DRIPs) which are the easiest to set up and manage. All you need to do is simply call your broker and ask to have your security (or securities) enrolled in the plan. DRIPs can be for dividend stocks or Exchange Traded Funds (ETFs) and more. Mind you, 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 which is why I wrote my step-by-step series:

Want to undertand Dividend Reinvestment Plans (DRIPs) and Share Purchase Plans (SPPs)?

Check out my comprehensive step-by-step series posted here on my site and shared with Dividend Ninja.

Part 1 – Getting started with DRIPs and SPPs. (on Dividend Ninja)

Part 2 – Getting started with DRIPs and SPPs. (on my site)

Part 3 – Getting started with DRIPs and SPPs. (on Dividend Ninja)

Part 4 – Getting started with DRIPs and SPPs. (on my site)

Part 5 – Closing your DRIPs and SPPs, transferring shares to your brokerage. (on my site) – Posted on February 21, 2012

Synthetic DRIP Example with Discount Brokerage

Pretend you own 100 shares of Company ABC. ABC declares a dividend of $0.20 per share. This means you get paid $20.00 for the 100 shares you own. Dividends by ABC are paid quarterly, so you get $20 every 3 month unless ABC decides to raise, lower or stops their dividend payments to you.

Now, you have a few options about what to do with your $20. Let’s look at those:

1. You could take the money in cash. ABC will deposit the cash directly into your discount brokerage account.

2. Some Canadian companies (like Company ABC in our example) offer shareholders the option to reinvest their dividend payment to buy more shares – this is a DRIP. Instead of cash into your account you would receive more stock.

Example 1:

$20 in dividends.
ABC share price is $18.
Your DRIP would buy you 1 whole share of ABC (@ $18.00) and the rest would be paid in cash ($2.00).
You now own 101 ABC shares.

This plan will repeat for you every quarter so long as ABC pays a dividend.

At any time, Company ABC might raise, lower or stop their dividend payment to shareholders. If ABC raised their dividend, say to $0.22 per share but the stock price doesn’t rise that much, say from $18 to $19 per share, you will receive more dividends and ABC stock can still be reinvested:

Example 2:

101 ABC shares now owned (remember,you got 1 whole share reinvested last quarter).
$22.22 in dividends.
ABC share price is $19.
Your DRIP would buy you 1 whole share of ABC (@ $19.00) and the rest would be paid in cash ($3.22).

For many established Canadian companies they typically have a very long history of paying dividends:

Canadian bank Bank of Nova Soctia (BNS) has paid dividends every year since its foundation in 1832.
Canadian bank CIBC (CM) has not missed a regular dividend since its first dividend payment in 1868.
Canadian energy company Enbridge (ENB) has paid dividends for almost 60 years.

Want some DRIP facts?

The upside of DRIPs:

Full DRIPs provide dollar-cost averaging.
Full DRIPs allow you to buy partial shares accelerating your stock ownership.
Most full and synthetic DRIPs have no commission fees.
Full and synthetic DRIPs take advantage of compounding.
Many great stocks offer full DRIPs with Share Purchase Plans (SPPs).
Many great stocks have SPPs with no minimum purchase requirement. Meaning, you can buy partial stock shares for as little as $10 or $15 or $20 for examples.
You can “turn off” your DRIP whenever you want the dividend income (cash) instead. Just call your discount brokerage.
DRIPs can help take the emotion out of investing.
DRIPs can be a “set it and forget it” retirement plan once you have many stock holdings.
Treasury DRIPs can provide discounts. A Treasury DRIP is a dividend reinvestment plan that uses dividends to purchase more shares directly from the company’s treasury stock. Oftentimes, because the company is issuing the shares, it will offer shareholders a small discount on the share price; this discount typically ranges from 2-4%.

The downside of DRIPs:

With DRIPs you can’t control the price or timing of the dividend reinvestment purchase.
In a full DRIP you are not using dividend income to be strategic; buying more shares when the stock price could be lower.
Setting up a full DRIP with a transfer agent can be time consuming and complex at first.
To set up a full DRIP, in some cases, there are some costs to buy shares and get the share certificated for the transfer agent.
With a synthetic DRIP, you need enough dividend income to buy one full share.
You need good accounting skills to keep track of your adjusted cost base; especially when you sell your stocks.
Some full DRIPs with SPPs have minimum purchase requirements.
Not every company that pays a dividend offers a DRIP plan, check with your discount broker before you buy the stock.
There are notification delays (i.e., about a week) from the transfer agents regarding dividend investment transactions; transactions are not real-time.

Want some resources other than my site?

Canadian DRIP Primer – a complete source for information on Canadian DRIPs (Dividend Reinvestment Programs), Share Purchase Plans, Canadian discount brokers and more.

DRIP Investing Resource Center

Canadian Dividend Reinvestment Plans (DRIPs) – an excellent online resource with information, news and views on the world of DRIP, with a Canadian focus.