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.
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.
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?