Revisiting why I DRIP

To DRIP or not to DRIP, is that the question?

This Shakespeare-esque question popped into my head again after reading other blog articles about Dividend Reinvestment Plans (DRIPs).

Personal finance and investing is, after all, personal, so I’m not convinced dividend reinvestment plans are everyone.  Maybe you prefer the income from dividend-paying stocks.  Maybe you need the income from dividend-paying stocks (for living expenses).  At this point in my life, I’m not in either camp but this doesn’t mean things won’t change.  Until that time comes, hopefully this post will help you consider DRIPping to reach your investing goals, just like DRIPping is helping me reach mine, for many of the positive reasons below.

Full DRIPs

One of the best benefits of full DRIPs, with company transfer agents such as Computershare and CIBC Mellon, is the opportunity to make optional cash stock purchases with no fees.  That’s right, no commissions.  At the cost of an envelope, a stamp, and a few minutes spent walking up the road to the mailbox, I can own more Bank of Nova Scotia and Fortis stock every month and quarter respectively; two companies I’m currently DRIPping.  This benefit is huge for the small-time investor (like me) because over time, I can slowly build-up positions in dividend-paying companies without any fees.  While different companies have different rules; how often these optional cash purchases can be made, what the minimum purchases are, my positions are sure to grow over time due to another benefit of full DRIPping – fractional shares get reinvested.  Yup, full DRIPs with transfer agents reinvest fractional shares.  My Fortis DRIP recently reinvested 0.026975 more shares.  Yes, fractional shares to the sixth-significant digit.  Crazy right?   Believe it.  I heard about this but I didn’t believe it until I was getting the statements to prove it.  This may seem trivial, but fractional shares do add up rather quickly.  This is a major difference between a full DRIP and a synthetic DRIP offered by a discount broker:  the discount broker only reinvests full shares.  With full DRIPs I’m getting my two favourite stocks working that much harder and faster, accelerating compound growth for free.   The third major benefit of full DRIPs, I take advantage of company discounts for shares being reinvested.  I’ll type this again in another way – the company’s stock is always on sale!   Bank of Nova Scotia offers a 2% discount, but some companies offer an even bigger everyday sale.  TransAlta offers 3%, Canadian REIT offers 4% and Emera offers a 5% discount!

So, let’s recap, full DRIPs work for me because:

  • Optional Cash Purchases can be made for the cost of a stamp.
  • Fractional shares accelerate compound growth.
  • Discounts are available.

Pretty impressive stuff really!  Check out these great sites, sites I’ve used to learn more about full DRIPs and the companies that offer them.

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

 

Synthetic DRIPs

Synthetic DRIPs, are not associated with transfer agents and do not allow you to use optional cash purchases to purchase company stock.  Company stock is only reinvested when you have enough shares to buy at least one full share.   A quick example:

You currently own 100 shares of Company ABC:

  • Company ABC pays a $0.20 dividend per share per quarter.
  • The end of the quarter just occurred – so $20 was paid.
  • Company ABC share price is currently $18.
  • Instead of taking the $20 in cash, your DRIP would buy you 1 whole share of Company ABC (@ $18.00) and the remainder would be paid to you in cash ($2.00).
  • You now own 101 ABC shares and $2.00 cash, leftover from the synthetic DRIP.

This synthetic DRIP cycle will repeat (dividends paid, dividends buy stock, stock pays more dividends, more dividends buy stock) so long as 1) Company ABC pays a dividend and 2) dividends paid are enough to buy 1 full share.  It will also continue so long as you don’t want your dividends reinvested, you might want the cash at some point instead.   With a synthetic DRIP, while I can no longer reinvest fractional shares, I can still take advantage of compound growth and discounts by companies that offer it.

DRIPping in general works for me because:

  • In either case, full or synthetic DRIPs, I’m taking advantage of company discounts when I can.
  • I don’t need the dividend income right now, but I want to take advantage of compounding for retirement income years down the road.
  • It puts part of my investment plan on autopilot, allowing me to focus on other personal finance matters like paying down our mortgage or line of credit (LOC).
  • DRIPs are easy to set-up for my TFSA, RRSP and other accounts – by making one phone call to my discount brokerage institution.

Depending on your financial situation and long-term goals, DRIPs may or may not be for you.  Regardless, I think they are definitely worth understanding as an investor.  You look into more, find out what you’re missing or revisit why you’re not using them.   There is no right answer here but you can’t improve, change or mature as an investor if you don’t know what you don’t know.

DRIPs are also available for your mutual funds (if you still own them) and ETFs as well but that’s another post for another day.  The principle for mutual funds and ETFs remains the same though – reinvest distributions over time; dollar cost averaging and compounding hard at work for you so you don’t have to work someday.  I think that sounds pretty good.

This last sentence made me recall something Benjamin Franklin did and said regarding the miracle of compound interest.

When Franklin died in 1790, he left a gift of $5,000 to each of his two favourite cities, Boston and Philadelphia.  After 200 years, in 1991, those cities received the balance – which had compounded to approximately $20 million for each city.  As Franklin used to describe the benefits of compounding:

“Money makes money.  And the money that money makes, makes money.”

If you have any questions about DRIPs or DRIPping or just want to comment on my strategy, feel free to leave a comment.

Do you use DRIPping to meet your investment objectives?  What do you think of my strategy to use DRIPs?

33 Responses to "Revisiting why I DRIP"

  1. Excellent article to make the whole DRIP issue very understandable and clear. I’m sure many people were wondering about the exact differences between the 2 DRIPs, just like me.

    If one goes with a full DRIP, and if one decides to sell the stock, how do we sell the partial shares?

    Reply
    1. @Peter,

      Thanks!

      If you go with a full DRIP, you can withdrawal partial shares. It’s a sale, per se. You can ask for shares to be withdrawn in either certificate form or sold altogether. The latter, sale, is for a fee. I don’t do this myself. The former, a request for partial shares to be withdrawn from the DRIP comes at no cost. I have done this.

      Thanks for your comment!

      Reply
  2. MOA very well done – great article! Thanks for the mention btw. These back to basics are always a bonus for the investor who finds them and gets their questions answered.

    I personally believe in dripping everything I can (whether it’s stocks, bond ETFs like Claymore CLF and CBO, or reinvesting into new mutual fund or index fund units). To not take advantage of the power of compound income doesnot make sense to me – but it’s personal preference.

    I’ve never gone for the Full DRIP plan for several reasons: 1. You can’t buy and sell your shares easily, 2. It costs more to setup in the short-term, i.e. share certificate purchase etc. 3. It’s costly if you decide later to transfer to your discount brokerage. But the benefit of course is contributing small amounts over a long period of time…

    Again, well done MOA!

    Cheers
    The Dividend Ninja

    Reply
    1. @Ninja,

      Anytime, for the mention.

      DRIPping everything you can, synthetically, makes absolute sense to me, as long as you don’t need the dividend income for living expenses. I’m sure I’ll have a different perspective in another 5 or 10 years, but until then, I want to take advantage of as much compounding as I can.

      I see your point with full DRIPs, re: costs to transfer to discount brokerage. It will be interesting for me to see what gains will be realized in this tax year, since I have made a few transfers. I plan on writing a post about that when the time comes.

      Thanks as always for your comments!

      Reply
  3. Hey Mark,

    I think DRIPs are one of Wall Street’s best kept secrets. Ninja is right that they can be unwieldy, and they do cost money to set up. But once you get it going, if you’re a long term investor, few options are as good.

    I remember having a somewhat unusual personal policy when I was looking for businesses that offered DRIPs. Some companies offered their own stock at discounts to the market price, but I opted not to go with businesses offering discounted shares. In my view, it didn’t make reasonable business sense. Offering shares at a discount will cost a company money. And as an owner of that company (via the shares) my company would be bleeding small bits of money to offer that incentive. Ultimately, costs (any company costs) affect the bottom earnings line, and the bottom earnings line affects the stock price over the long term. So….I thought it was silly for companies to try enticing new owners with discounts at the expense of current owners…it’s a bit of a smoke and mirror show. I want to be “partners” with people who own the company with a long term perspective and who choose to own the shares because they expect and hope to make 1000%+ over the next 30 years (that’s just over 8% annually) on the shares, rather than getting enticed by a 2% bonus that costs the company money. What do you guys think? Is my thinking off base? Or does it make some sense?

    Reply
    1. @Andrew,

      One of the best kept secrets indeed!

      I don’t think your personal policy is really that unusual. Ultimately any company costs affect earnings but the funny thing is, these discount costs must be so insignificant so management doesn’t worry about them. Otherwise, these costs would be cut too, no? I would have to assume there are bigger fish to fry in a large organization, than share discounts, but I could be way off here.

      Thanks, as always, for your comments Andrew!

      Reply
  4. @Andrew Hallam

    Yes what you are saying makes perfect sense, for the same reason companies offer higher than normal dividend yields to entice investors. Great companies don’t need to offer higher yields or discounted DRIPs to entice investors. I guess you get what you pay for.

    They are likely the companies you would consider secondly, but if it’s a company your are interested in, then the Full DRIP discount is a good deal 🙂

    Reply
  5. @ocean: If I’m not mistaken, most discount brokerages will honour DRIP discounts. The only one that I’ve heard that doesn’t seem to come through is Questrade. MOA – are you aware of any other culprits? 🙂

    Thanks for the mentions MOA, I really appreciate it.

    I really like the concept of fractional share purchases with Full DRIPs and I can definitely understand why many investors go the transfer agent route in order to take advantage of compounding and the long term benefits associated in being enrolled with these plans.

    Personally, I go with strictly synthetic DRIPs and within registered accounts only (I also plan on setting some up within my holding company).

    I would like to know how many investors are taking advantage of DRIPs for each company. To be honest, I agree with MOA in that my suspicion is that the costs associated with providing discounts must be marginal in the broad scheme of things.

    Although I agree that 2%-5% discount on shares reinvested should not be the driver behind anyone’s rationale in investing in a particular company, I would argue that there are still some great companies to invest in AND that offer discounts, such as BNS-T, FTS-T, IPL.UN-T, and ENB-T to name a few.

    Great post MOA! 🙂

    Reply
    1. @TWC,

      I was aware of Questrade, but not sure of others. I’m almost positive all the big banks (5) will honour synthetic DRIPs. I haven’t personally checked, if HSBC or QTrade does. I would say they don’t but could be surprised here.

      I don’t know the proportion of DRIPpers vs. non-DRIPpers of various company stock, but that would be interesting for sure. I suspect more investors take the cash vs. reinvest. I could be wrong here, but just guessing. Do you know? Have you seen any studies on this TWC?

      I know for the next few years, I’m going to be synthetically DRIPping everything I can. I plan on using the leftover money, dividends that cannot buy shares, to pay down debt – but that’s another post 🙂

      Reply
  6. Thanks for the tips, a well written article!

    2 questions –

    How do you calculate the new ACB with the DRIPs. Can you rely on the brokerage’s calculation of historic costs of the new shares. I’ve had a hard time matching my own calculations to the brokerage’s calculations – probably because the brokerage rounds up certain numbers?

    Some brokerages do not allow the DRIPping of US stocks/dividends – why is that?

    Reply
    1. @Qubikal,

      ACBs are somewhat tricky with full DRIPs, since the transfer agents don’t track this for you. Here is a really great site that offers some details on this:

      http://www.dripprimer.ca/calculate-acb

      Hopefully that link will help you?

      Personally, I keep track of my ACB up to the transfer date (full DRIP to brokerage) then rely on the brokerage’s calculations and statements. I have to trust the brokerage’s statement from that point on – at least if I get audited, I have e-records I can print and send to CRA.

      I suspect some brokerages do not offer DRIPs for U.S. stocks because potentially a few U.S. companies do not have a reinvestment plan. Further than that, unfortunately I don’t know why.

      Are there particular U.S. companies you are trying to DRIP?

      I just called one brokerage over the last week to inquire about some U.S. companies I could DRIP and some I couldn’t. I found out that companies like WMT, SYY, LOW in the U.S.; big blue-chip stocks I can usually DRIP. There are some exceptions. Companies like HGIC, Harleysville Group, an established dividend-payer I cannot. This makes me think there must be a cost associated with maintaining some U.S. DRIPs. HGIC has a DRIP.

      Maybe some folks in the financial industry can chime in?

      Reply
  7. DRIPs and RRSP accounts

    I have synthetic drips set up in my discount brokerage account at BMO. I have full DRIPs set up in my Canadian Shareowner account which is also an RRSP account. There are some ongoing commissions associated with this account, but I have found it to be an excellent organization to deal with.

    Does anyone have any other options to combine full DRIP and an RRSP account ?

    Reply
    1. @Brian,

      Thanks for checking in!

      It is my understanding that full DRIPs, rest with Transfer Agents, and as such there are no full DRIPs available (to buy fractional shares, use OCPs, etc.) for RRSP accounts.

      Have you heard something to the contrary?

      Reply
  8. I was wondering if there were any other options out there.

    I have used the Canadian Shareowner low cost investing program for over 10 years and is very easy to use. It features fixed dollar amount investing in a pre-screened list of Canadian and US listed securities. The shares are purchased in fractional shares to 4 decimal points. The dividends are reinvested for free (this is also mandatory). Right now the commissions are 9.95 per security or $40 for as many as you want in one trade. These trades are done on set days each month. For example popular stocks like TD Bank are traded every Tuesday, whereas Fortis is traded on the 4th Monday of the month. You can place immediate trades for $29.

    Reply
    1. @Brian,

      Are you asking if there are different options for owing U.S. securities and DRIPping them? Unfortunately I don’t have any experience using Shareowner. I do have experience with stock transfer agents like Computershare and CIBC Mellon.

      Let me know how I can help.

      Reply
  9. You say that discount brokers do not reinvest dividends in fractional shares. I don’t know if you consider Vanguard a discount broker but I have my retirement accounts with them. They do fractional shares. Whatever my dividend amount is, they fully convert it into shares with no commission or other cost. When I do buy stock, Vanguard’s commissions are very reasonable.

    Reply
    1. @Sheila,

      Really, Vanguard does fractional shares? I know all big Canadian banks don’t bother with fractional shares, but that’s great if Vanguard does. You have a brokerage account with Vanguard directly? Here in Canada or I’m assuming, in the US?

      Thanks for the comment Sheila, great information to know.

      Reply

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