This blog is about saving and investing my way beyond a $1 million portfolio.
…and using DRIPs have helped us!
What is a DRIP?
A DRIP is an acronym for Dividend ReInvestment Plan.
You probably already know that some companies use dividends to pass on their profits directly to shareholders. 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.
A Dividend ReInvestment Plan (DRIP) therefore allows you to automatically reinvest the dividends paid into more stock shares. So, company pays a dividend; cash gets reinvested to buy more stock shares, and this process is repeated continually until you want it to stop. Think of a DRIP like this: money that makes you money, will generate more money.
There are some things you should be aware of when it comes to DRIPs:
1. There are “true” or “full” DRIPs using the company’s transfer agent
- These are dividend reinvestment plans set-up with the stock company’s transfer agent (not a discount brokerage). You need to own at least one share of the company you want to DRIP with the transfer agent. The share certificate can be mailed to you by your discount brokerage usually starting at a cost of about $50 + HST. Alternatively, you can avoid any transaction fees obtaining the single share by purchasing your share using a private exchange board. (I’ve never done this myself.) You then take your share certificate and enroll it into the DRIP administered by the company’s transfer agent. Check out my step-by-step series below, in how I set-up my DRIPs many years ago.
2. There are “synthetic” DRIPs using your discount brokerage
- These are dividend reinvestment plans set-up with your discount brokerage. In some cases, all you need to do is contact your discount brokerage and inform them about the shares you wish to DRIP. Tell them: “I want to enroll company XYZ in a dividend reinvestment plan please.” They’ll do the rest.
- At some brokerages, you can also enroll the entire account in a dividend reinvestment plan. That way, regardless of what you own inside your TFSA, RRSP, RRIF, etc. any current or new company shares will be automatically enrolled in the reinvestment plan.
You might be asking: how come some brokerages allow synthetic DRIPs and other brokerages do not?
Well, not all brokerages are created equal.
Example: Enbridge (ENB) my first dividend paying stock suspended their company DRIP in 2018. For anyone still getting a DRIP with ENB stock, that’s because the brokerage is doing it for you. It’s a synthetic DRIP whereby the broker buys the shares on the open market for you. Not all brokers will allow you to enroll in a synthetic DRIP for some accounts let alone for some stocks!
If you want to set-up a synthetic DRIP for some accounts (e.g., TFSA, RRSP, Non-Registered):
- Contact your brokerage – see if they even honour synthetic DRIPs at all.
- Confirm with brokerage what accounts they have synthetic DRIPs for.
- Confirm with brokerage what stocks within your accounts you can establish DRIPs for.
- Ask brokerage to enroll you in the DRIP or opt-in as necessary by account or stock.
3. There are “DIY” DRIPs using your discount brokerage
- In your portfolio of stocks simply let the cash accumulate from the dividends paid until you decide to add to an existing position when you feel the price is right for you.
4. There are two (2) types of dividend payments when it comes to DRIPs:
a) Treasury DRIPs:
A dividend reinvestment plan that uses dividends to purchase more shares directly from the company’s treasury stock. In some cases 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%.
b) Market DRIPs:
A dividend reinvestment plan where the company uses its cash dividends to purchase shares on the open market, rather than from its treasury.
5. You can establish a DRIP for your ETFs too!
- DRIPs can also apply to Exchange Traded Funds (ETFs). Just call your brokerage and ask them to enroll those funds into a reinvestment plan. I do this for my low-cost U.S. ETFs and Canadian owned ETFs. Easy as that!
If you want to get started with a full DRIP and Share Purchase Plan (SPP) with stock transfer agents, check out the comprehensive step-by-step process I followed a few years ago.
Part 1 – Getting started with full DRIPs and SPPs
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.
The summary of posts below will give you some guidance on just one page about starting your DRIP journey with company transfer agents.
Questions and answers
Question to My Own Advisor:
I’ve heard about dividend reinvestment plans (DRIPs) – what are they?
A dividend reinvestment plan (DRIP) allows an investor to automatically reinvest his or her dividends, sometimes at a reduced price, without commission fees. It’s a beautiful thing really. When the stock shares you own pay enough dividends to buy one whole stock share, you can ask your discount broker to reinvest the dividends paid to buy more stock shares instead of getting the cash deposited.
This process is usually a phone call away to your discount broker. Dividends will be automatically reinvested to buy more shares when dividends are paid until you say ‘”stop”.
What I have described above is a synthetic DRIP associated with eligible dividend-paying corporations.
When some people talk about DRIPs, especially the die-hard dividend investors, just know they might be talking about full DRIPs (dividend reinvestment plans with share purchase plans or SPPs for short).
Question to My Own Advisor:
What makes full DRIPs different than synthetic DRIPs?
The power behind full DRIPs (that includes share purchase plans) lies with the fact you can start this process with very little money – you don’t need to own tons of stock shares that pay enough dividends to reinvest whole shares. In some cases, you can start with one stock share!
A full DRIP is an investment program offered to shareholders by certain corporate securities issuers or company transfer agents. AST (formerly Canadian Stock Transfer Company, that was formerly CIBC Mellon) and Computershare are the two major transfer agents in Canada:
In many cases, full DRIPs with company transfer agents also permit investors to make additional cash contributions to their plans. This is the share purchase plan part I was talking about. Investors can buy additional shares in the company and in most cases, at no commission. You simply write a cheque and mail it in! Your payment is used to buy more shares, even fractions of shares, at the cost of a stamp.
The company transfer agents do all the work; you just need to write the cheque. The compounding power of full DRIPs comes with SPPs. These share purchase plans allow you to buy more shares, in small amounts over time, at your own pace, with fractional shares reinvested.
With some full DRIPs, depending on the company and what it wants to offer investors in the plan (more on that later), you can also take advantage of stock purchase discounts; ranging from 0% to 5%. You don’t have to apply for these discounts, they are applied automatically.
Think of it this way, your favorite stocks are always on sale. Again, the company transfer agents do all the work. It doesn’t need to be in the thousands of dollars. It doesn’t even have to be in the hundreds of dollars. In most cases, you can start with $25 or $50 depending upon what the full DRIP with SPP company plan says. You can also send this cheque whenever you want, even skip a month or a quarter if you wanted to. Pretty cool eh?
Advantages of full DRIPs and SPPs
- Can provide dollar-cost averaging.
- Many great stocks offer full DRIPs with SPPs that allow you to get started with investing as part of the company’s dividend policy.
- Full DRIPs with SPPs can help take the emotions out of investing.
Disadvantages of full DRIPs and SPPs
No investing strategy is perfect, and full DRIPs with SPPs are no exception. Before we get too far down the road of getting that first share and DRIPping your stocks, here are some downsides to full DRIPs with SPPs you should strongly consider.
- With full DRIPs and SPPs – you can’t control the price or timing of the dividend reinvestment purchase, the company transfer agent is in control of transactions. This means some investors may claim you are not being strategic; buying more shares when the stock price could be lower.
- Setting up a full DRIP and SPP can be some work. Just being honest here and you’ll see the steps you need to take below.
- Setting up a full DRIP with SPP, there are costs involved. I mean, you need to own that first share, from someone or somewhere including your discount brokerage, and get the share “certificated”.
- You need some 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; some are $100 or more.
- There are some notification delays (i.e., about a week) from the transfer agents regarding dividend investment transactions; transactions are not real-time.
- The transfer agent can sell shares for you, but you won’t have any say over the time and price you get, and you may have to pay a small fee for them to do so.
Part 2 – Getting started with full DRIPs and SPPs
Question to My Own Advisor:
I still want to get started. 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 Timmys?
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:
The DRIP Investing Resource Center (and getting that first share). This Board is excellent.
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.
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.
Here are the steps I took with option 3:
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:
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 (how many years)
- dividend growth (how many raises over time)
- dividend yield
- dividend payout ratio
- company cash flow
- …and more.
Step #2 – Open a Discount Brokerage Account and put money in it
TD Waterhouse, BMO InvestorLine, CIBC Investor’s Edge, RBC Direct Investing or Scotiabank’s iTRADE are all excellent candidates for that. I would suggest any one of these guys since you could get that first stock share yourself, by placing a trade online.
Take your time, do your homework and get an online broker that is known for its good customer service and one you feel comfortable dealing with. Ask people, get opinions from them; read reviews and recommendations online.
If you’ve chosen one of the big five banks for your discount brokerage account as I did, find out how to put some money into it. I suggest putting at least a few hundred bucks in the account initially, if not closer to $1,000.
Why? Many big-bank discount brokerages charge you a fee if you don’t have a certain threshold of assets with them, let alone a certain threshold of money in this discount brokerage account itself. I recall most big-bank brokerages want you to have about $10,000 in assets in this account before any fees are waived.
CIBC Investor’s Edge used to charge something like $60 per year in fees if you don’t keep a balance of $10,000 or more; same with RBC Direct Investing. I’d call them to be sure of their fee structure. I also recall some discount brokerage accounts like Scotia’s iTRADE might charge you inactivity fees if you don’t keep a certain balance. All this to say, please find out what you’re opening. Read the fine print. Shop around. It’s your money right!?
In my case, years ago, I had over $10,000 invested already with one of these big banks, largely in mutual funds, so I just moved this account into a new discount brokerage account. I was fortunate to be over this threshold at my discount broker a few years ago, so I avoided the fees.
Step #3 – Buy the stock through your Discount Brokerage Account
(If you followed Option # 1 or # 2 above you don’t need to follow this step. )
How many shares should you buy? This depends on how much you can afford to spend really. Assuming you have some money in your brokerage account to avoid those account fees I mentioned, you have some investing knowledge and you’re ready for direct stock ownership (lots of assumptions I know), most full DRIPs only need 1 share for starters. Using Bank of Montreal again as my example (pic below), you’ll see only 1 share is required for the folks at Computershare to get you going. I’d suggest before you make any transactions with your online discount broker, contact the friendly people at Computershare or Canadian Stock Transfer Company to confirm minimum purchase requirements. They’re there to help you.
Step #4 – Order the stock you purchased in “Certificated Form”
(If you followed Option # 1 or # 2 above you don’t need to follow this step. )
So you’ve made the buy and now you own at least one if not a few shares of the company you want to DRIP in your brokerage account. So far, so good!
Now, wait for the transaction to settle. That usually takes 2-5 business days. After this time period has passed, based on the number of shares required to start your full DRIP, you need to request your discount broker to issue you the certificate. This certificate will be sent to you via postal mail.
In our example, since Computershare wants 1 share of Bank of Montreal stock to start the DRIP, order 1 share from your discount broker in “certificated form”. You’ll probably have to call your discount broker to make this request. I remember I had to.
Some notes about this process:
- Ensure your discount broker prints the share certificate in the same name you want to register your share with the transfer agent. It just keeps things simple.
- Ensure the broker sends the share certificate to the correct address. You don’t want this certificate going somewhere else!?
- Know that you’ll need to pay money for the share to be made in “certificated form”. Big-bank discount brokers usually charge a fee of about $50 plus taxes or HST. Some online discount brokers, so I’ve heard, charge much more.
- Expect the certificate to take 2 or 3 weeks to arrive in the mail.
If you didn’t buy the share certificate from your discount brokerage account but instead got it transferred to you from someone you know, or from a Share Exchange Board, then you should have in your hot little hands, something that looks like this – a share certificate with your name on it:
Whenever you get this share certificate, be careful with it. Don’t use this certificate as a placemat or treat it like an older newspaper. It’s worth money! What you have done is take the stock the seller owned or you owned in your discount brokerage account, from its “street form” to full ownership under your own name. So, when you get the share in “certificated form” ensure your name and address is accurate on it!
Step #5 – Start company transfer agent paperwork to enroll the stock in DRIP with SPP
So you’ve made the buy, the transaction has settled and you’ve asked for your share in “certificated form” from your discount broker. Or, maybe you got your share from a Share Exchange Board. Good work so far!
Let’s start some paperwork for submission to the stock transfer agent. You can visit the transfer agent’s website and download required forms to initiate your full DRIP and SPP. What type of paperwork? Well, the DRIP Circular or the Plan Brochure will tell you so you should have already read that, but if you’re not sure you can call the transfer agent to talk it over. The transfer agent will confirm what forms you should be completing to enroll in the DRIP and SPP.
Usually you need to complete a few forms:
- One associated with the dividend reinvestment plan; to state you want all fractional dividends reinvested,
- One associated with the share purchase plan; to state you want to submit cheques to buy more stock, and
- One confirming this DRIP enrolment is not associated with any money laundering activities.
Beyond these forms, as a suggestion, I think a “letter of direction” is helpful. This way you can spell out in a personal letter to Computershare or Canadian Stock Transfer Company (now AST) your intentions to start the full DRIP and SPP with them, just in case some of the forms completed have some minor errors on them. It’s not a big deal, errors on the forms but if there are major mistakes the transfer agent won’t process your request. When in doubt about how to complete any fields on the transfer agent forms, don’t hesitate to call them. They are there to help you. I’m guessing there isn’t a question they cannot answer when it comes to DRIPs and SPPs. I know I’ve asked them a bunch of questions over the years and I always got an answer.
Step #6 – Mail your transfer agent forms and letter of direction
Once you have your share certificate in your hot little hands, remember two things:
- Complete the transfer agent forms with the share certificate number identified on your certificate. If you’re not sure what that number is, call the transfer agent.
- Keep that share certificate in a safe place! Don’t send your share certificate to the transfer agent! This is a real share, in a real company, and you want to hold onto it!
Mail your forms and letter direction to the address specified on the forms. It will take a few more weeks to get your share enrolled in the DRIP and SPP. Be patient and follow-up in 2 or 3 weeks with a phone call to the transfer agent to ensure everything got processed the way you thought it would.
Step #7 – Send a cheque as part of your share purchase plan (optional cash purchase), and enjoy!
Once your share has been registered with the transfer agent, you should get some paperwork from them in return including a form called an optional cash purchase form. Every month or quarter based on what the DRIP Circular or Plan Brochure will allow, you can write a cheque, complete this optional cash purchase form and mail the form with your cheque to get your stock purchases commission free. Yup, your money for something and your stocks for free! There is no requirement to send in a payment every month or quarter. Depending on the company DRIP however, you must be mindful of the minimum purchase amounts required. Some stocks have no minimum (Bank of Montreal for example), others have minimums of $100 (like CIBC, Bank of Nova Scotia for examples) and some companies are even higher. Remember, one of the cardinal rules of investing, understand what you’re investing in. DRIPping stocks is no different. That means if you decided to DRIP a company that had a $100 minimum purchase the cheque you must send to the transfer agent must be at least $100.
After dividends are reinvested and/or every time your cheques are cashed, you will receive a statement from the transfer agent with transaction details. You will continue to receive regular statements detailing your holdings for each company you own as long as your stocks stay in the DRIP with SPP. Keep all statements/records for tax purposes. Don’t lose them! You’ll need this information to calculate your adjusted cost base for the stocks you’ll accumulate over the years.
And there you have it! You’re done!
DRIPping doesn’t appeal to everyone. That’s OK. As you have read it full DRIPs with SPPs takes work. As investors, we all have different investing goals, objectives and strategies to execute. Indexing and DRIPping dividend-paying stocks happen to be mine, a two-pronged approach.
More articles on DRIPping:
Want an example? 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 months 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 $20 in cash. ABC will deposit the cash directly into your discount brokerage account.
2. You could reinvest that money via a DRIP.
- 100 ABC shares paid you $20 in dividends.
- ABC share price today is $18.
- Your synthetic 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 and you own enough shares to reinvest one (1) full share.
- You now own 101 ABC shares (remember,you got 1 whole share reinvested last quarter).
- Luckily, ABC company raised their dividend for you from $0.20 per share to $0.22 per share 🙂
- Your 101 ABC shares now pay $0.22 per quarter.
- Your 101 ABC shares just paid you $22.22 in dividends (101 * $0.22).
- ABC share price today is $19.
- Your synthetic 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 decades.
You can read about some of my stocks and the friendly dividend histories of many Canadian stocks in these posts below: