Pros and cons of dividend reinvestment plans
Readers of this site will know I take a hybrid approach to investing, including using dividend reinvestment plans for wealth-building.
Today’s post highlights my pros and cons to using those dividend reinvestment plans – things you may want to consider!
How I invest!
I invest in a number of Canadian dividend paying stocks for long-term growth and income, and I use synthetic dividend reinvestment plans (affectionately known as “DRIPs”) to accelerate that growth.
This chart is an example of some of that power over the years, current to the time of this post:
I also invest in some low-cost Exchange Traded Funds (ETFs) for U.S. and international diversification.
I arrived at this two-pronged investing approach / hybrid investing approach because I feel our Canadian market is not very diversified – so it becomes easier to replicate said market in a Do-It-Yourself (DIY) stock portfolio and own what the big ETFs in Canada own and pay no ongoing money management fee to do so.
You can read about how I unbundled my former Canadian ETF for income and growth here.
Here are some very friendly dividend histories of many Canadian companies.
This is how you can build a million-dollar portfolio – or very close to it!
Why the hate for dividends???
While dividend investing makes up a very big part of my investing approach, including the stocks that pay dividends in my portfolio, dividends aren’t the be-all, end-all for investors for a few reasons:
- The trouble with any “live off the dividends approach” is that you’d need to save/invest too much to generate your desired income. For example, it might take a $1 M portfolio to “safely” generate ~ $40,000 per year in dividends without touching the capital.
- Whether you’re living off dividends or capital gains – it’s the same difference really. $1 earned (whether it’s from dividends or capital gains) is still $1 earned. Dividends are therefore part of an investor’s total return.
- Stock picking (including selecting dividend paying stocks to buy and hold) is fraught with under performance of the index long-term.
- You can never possibly know long-term how dividends may or may not be paid by any company.
- And more and more and more…
As mentioned a few times on this site, in many respects, these investors are not wrong.
- You do need a bunch of capital to generate healthy income if you’re not selling stocks and relying on cash flow.
- Dividends are just one element of total return.
- Stock picking can deliver market under performance.
Why I love dividends!
The ability to live off dividends (and I should add distributions from our low-cost ETFs) will be beneficial for reasons beyond the risks above.
Living off dividends has a few benefits:
- Given future unknowns – having ample capital churning out income in our financial future will give us many options.
- I’m conservative as an investor – so living off dividends and distributions aligns with my behaviour and investing approach.
- Dividend income is real money – dividends provide tangible money I can spend without little fear or stock market risk.
Pros and cons of dividend reinvestment plans
At some point on your investing journey, you might consider running one or more dividend reinvestment plans (DRIPs) for one of your holdings or at the very least, you might want to know what the heck a DRIP is.
Well, you found the right blog to help you out!!
Here is my comprehensive series on DRIPs. heck that out and let me know if you have any questions!
From that series and articles on that page, you already know that these plans can be synthetic (i.e., set up and maintained by your discount brokerage for you) or full with share purchase plans, to take advantage of fractional share purchases with stock transfer agents.
Based on this reader question of late, I thought I would review the pros and cons of dividend reinvestment plans including what I’ve experienced.
(Adapted reader email):
Love the site! I was wondering what you thought of the Enbridge suspension of their DRIPs? Do you see this as part of the downside with DRIPping or dividend stocks? Does your brokerage still honour the synthetic DRIP for Enbridge?
Thanks for your email and your readership.
Well, I don’t have many thoughts on suspended DRIPs per se other than such companies are obviously trying to streamline their investor relations activities and retain equity. More on that in a bit…
You’re probably aware there are a number of benefits that come with DRIPs.
Here are just some of my favourites:
- There are no commissions
When you sign up for a full DRIP, with stock transfer agents, your cheques or preauthorized withdrawals are used to purchase fractional shares commission-free. This is a HUGE benefit to keeping your investing costs low, something I’m a huge advocate of.
- Dollar-Cost Averaging
The nature of DRIPs (synthetic or full) is that your money can be invested (and reinvested) over time automatically. So, regardless of what Mr. Market says about your stocks on any given day (up or down), by participating in a DRIP you’re taking advantage of all types of prices to average out your purchase price over time. I believe doing so helps take the emotions out of investing which should help you build wealth over time.
- The power of compounding in action
Money that makes money can make more money. By enrolling your stock (or ETF) in a DRIP, you get your money working for you with the compounding power that is fractional shares (full DRIP) or whole shares (synthetic DRIP). Here is a quick example to demonstrate the power:
Over a month of investing, would you rather be paid just a measly penny (I know they don’t exist anymore but….) on Day 1, but that money doubles every day throughout the month for 30 days OR would you rather be paid a fat $100,000 per day, every day, for the entire 30-day month?
There is no question what I would choose!!!
I would take the penny that doubles every day.
(Fact: $0.01 per day, that doubles in value every day for 30 days = $0.01 on Day 1; = $0.01 x 2 * 29th power for 30 Days = $5,368,709.12.
Compare that to $100,000 paid every day for 30 days = $3,000,000.) I’ll take the $5.3 million thanks 🙂
There are of course downsizes to full DRIPs:
- With full DRIPs (with Share Purchase Plans (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. That is a valid point but then again, dollar-cost-averaging helps take the emotions out of investing.
- Setting up a full DRIP and SPP can be some work. Just being honest here and I’ve lived that dream.
- To set up a full DRIP with SPP, there are always costs in getting that first share, from someone or somewhere including your discount brokerage to get the share “certificated”.
- You need some accounting skills to keep track of your adjusted cost base in a taxable account; especially when you sell your stocks to calculate capital gains.
- Some full DRIPs with SPPs have minimum purchase requirements; some are $100 or more.
Again, you can find many more details about setting up a DRIP, how to get started DRIPping stocks with just 1 (one) share, closing your DRIPs and SPPs and moving investments to your discount brokerage account, and more here.
The downside of DRIPs…
Mark: what do you make of the Enbridge DRIP suspension (at the time of this post)? Does my brokerage still honour the synthetic DRIP for Enbridge?
My answers are “Meh” and “Yes”.
“Meh” – it’s fine – because Enbridge is just one of many Canadian companies that have killed or suspended their DRIP in recent quarters. I recall other big companies like Canadian Utilities, RioCan REIT, and H&R REIT did as well. More are likely on the way.
While pausing or shelving a DRIP potentially hurts small-time investors who just want to get started with dividend stock investing for a very low fee, they may hurt companies too – something you don’t want as a shareholder. Company DRIPs will increase the number of shares outstanding; diluting shareholder value. This puts unnecessary pressure on the stock price. There are also company costs associated to run the program.
As one CEO put it in a Globe and Mail article I read on this subject:
“It was kind of hard to justify that we were going to give our equity away so cheaply,” said Michael Zakuta, president and chief executive officer of Fredericton-based Plaza Retail REIT (PLZ.UN), which suspended its DRIP recently.
Companies may have a DRIP to raise equity. They may also have a DRIP because it’s company policy to do so; part of their broader shareholder management plan. Dividends and DRIPs that go with them, are just one way companies can attract investors.
When Enbridge killed its DRIP, I was still able to reinvest all whole shares earned commission-free with my discount brokerage. The same is actually true for many discount brokerages for many stocks. Turning “ON” or “OFF” a synthetic DRIP (for a company or an ETF) is usually as simple as a phone call to that brokerage and giving them instructions for the company or the account that holds your stocks, ETFs, and bonds as a whole. As you well know by now, conversely, some brokerages might take the affected stocks no longer offering a DRIP off their own synthetic DRIP list – since not all brokerages are created equal.
Pros and cons of dividend reinvestment plans summary
At the end of the day, dividend investing let alone using dividend reinvestment plans (DRIPs) is a personal investing decision. There is no right or wrong and such an approach has risks.
Full DRIPs with SPPs provide an opportunity for investors to build long-term wealth without major commission costs to do so. Synthetic DRIPs allow investors to set and forget their dividends and take advantage of the power of compounding by treating their stock in a total return manner.
I hope this post provided some insight into the pros and cons of dividend reinvestment plans to help you make an informed decision.
Got a question for me? Send it my way and leave your thoughts in the comments below. I read every one!
Happy investing – Mark
You don’t say anything about the discounts some companies offer on their DRIPs. Now that hardly anyone is paying more than $10 a trade, the value of these discounts is over time worth more than the savings in commissions for those companies who offer them
Do you know of anyone who audits any of the brokers’ artificial DRIPs? Can I be confident the broker is selling the shares to me at the price the company issues them at?
Good update John. I should amend that post about that. I did cover a lot more detail on DRIPs and SPPs on this standing page here:
Are you DRIPping any stocks yourself right now?
As for your question, I can’t speak to detailed auditing practices but I would anticipate any audit would look at some of this, even by proxy (not all transactions, couldn’t possibly do that) to assure processes are being followed.
I am, but through my broker, not directly.
The auditors work for the shareholders, not the customers, so are unlikely to comment on any process that increases profits at the expense of customers, as long as no laws are being broken. Any such audit would have to be independent, and compare the prices paid directly to the companies with those charged by the brokers. I am not sure there is even a good source of data on what the companies charge, which any investor could compare with what their broker has charged.
To your points John, I can’t recall any site for that either. re: not sure there is even a good source of data.
I have faith that the synthetic DRIPs I run are following processes. I do check the dollar value of my expected dividends, seems very consistent with my spreadsheets.
If anyone owns EIF they just got another raise.
up.0075/month to .19 (2.28 annual)
I also noticed my CPX (Capital Power) raised their dividend by 7% recently. Always great when you get a raise and don’t even notice!
Good timing on this article…thanks. My daughter is in the process of moving her RESP and other accounts (later) to piggyback on my Investorline account to better manage her cost and start exploring the interesting topic of investing. My own dividends and payouts go into cash. But since her youngest still has more then 10 years before university, she could “safely” invest in individual companies and use DRIPs to better compound her earnings.
There are so many areas of interest and learning in the investment world. It’s nice to learn and refresh thinking with easy reading, quick and to the point articles with references….like yours.
Everyone has their own way to invest – reinvesting dividends doesn’t make it right or wrong as you know. That includes DRIPping ETFs at your brokerage. Some folks want to be strategic with their cash and I can fully respect that.
That said, I do believe reinvesting dividends takes a more total return approach to investing – whereby more shares are automatically purchased and if you own successful/proven dividend payers – there is a chance (not a given mind you) they will continue to pay dividends or increase them in the future. More shares, more dividends; more dividends and more shares further still. You get the idea!
All the best and thanks for using my site as a key reference! 🙂
Doing dripping enforced me to reinvest the dividends. I have accumulated a few thousands of dividends/distributions in my taxable account already and could not get enough courage to invest the money.
Nothing wrong with that. I do feel DRIPping takes all the emotions out of investing.
Completely agree. For me, that’s the biggest pro of dripping. I am always tempted to time the market this or other way.
Drips are nice to start out with as usually you not receive sufficient dividends to make a purchase worthwhile. The commission can eat up months of dividends if you buy just one share.
EX: My granddaughters RESP drips her shares so they are put to work right away and purchase price is less than market. There is simply not enough funds to purchase shares every month or quarter. There is some residual cash but this is minimal and gets used up with the next years contribution.
Once you have built up a sizable portfolio allowing monthly or quarterly purchases then I would go to straight dividends as this can facilitate market diversification and you can chose which stock/sector you wish to buy in to.
Currently pulling >$4K monthly (8mths) and >$9K quarterly (4mths) so that is usually reinvested within 2/3 weeks from receiving them. Still all in RRSP & TFSA so no tax consequences as of yet. That will change next year.
I can certainly see that approach. Pulling in > $4k monthly in dividends? That’s very, very good. Impressive stuff and well done. Cash flow is king in retirement or semi-retirement.
Averaged out it is just above $5.5K monthly. Those four mths with the quarterly divs make a big difference.
That’s amazing, great stuff.
This is a free resource to learn about ACB along with a tool to record your transactions . I have been using it for years.
I am sure your broker provides you with all of the details of your drip purchases- shares, costs etc to use with adjustedcostbase.
Thank you so much! Appreciate that:)
Great read as usual. Can I request you to write up on how to calculate ACB of a DRIP, or point out some resources that teach in details about calculating and recording ACB?
I’ll work on that one and add it to my list. Here is a free tool ES that I will reference in a future post to hold you over 🙂
Didn’t “refresh” I guess so I missed your post ahead of mine!
I have had a number of synthetic DRIPs and like them. I also like that with my brokerage it is easy to turn them on and off, if I want to.
The only thing to beware of, is if you are planning to sell a stock to claim a capital loss. Make sure to turn off your DRIP well beforehand. I got caught out with that and couldn’t do my year end capital loss that I was planning on (I had big capital gains that year and wanted something to partly balance them out).
Yes, I too have made the mistake of not turning off DRIPs not far enough in advance and getting an additional whole share I didn’t want (TransAlta).
I eventually sold every share many years ago and glad I did.
Had ShareOwners transfer all the shares of one company from my RRIF as a gift, which they did. Then after the transfer I received $135.63 dividend, then buying 1.8137 shares . Next quarter I received $1.58 dividend and purchased 0.0217 share. So I’ll still own a few shares, but the nice part is I won’t be accumulating a few dollars each quarter but continuing to grow my income by a few dollars.
Mark: Blog is coming along, but I’d call it an Opinion Blog, as I stress Income investing more than other options, and you’ll find some of my favorite music from the 1900s to 1930s.
I recall the transfer agents I used in the past cannew (CIBC Mellon before it became AST) also reinvested dividends to 4 decimal places. Pretty amazing how small time investors can buy fractional shares commission-free to start building wealth. I’m very glad I started that path myself, I learned a lot from that journey.
re: blog – good to hear!
Nice Mark. To drip or not to drip? That is the big question.
I think your article nailed the pros and cons. Especially the emotion part. Im enrolled in the drip program and the Enbridge thing really makes sense as they streamline the company.
Rbc still drips my shares and ill gladly keep taking more each quarter.
Maybe as a buyer and someone who holds a large enbridge position i wouldnt add to them on this dip, with all the recent delays in line 3.
Drips ensure im getting a piece of these lower prices and lower my dollar cost average. Sweet!
I love dripping stocks especially Canadian stocks. us stocks i dont mind the cash to fund new buys to avoid the currency conversion.
Anyways keep it up Mark
I recall RBC offers synthetic DRIPs for many Canadian stocks but do they offer DRIPs for U.S. stocks as well? I recall BMO doesn’t offer DRIPs for U.S. stocks (or at least they didn’t a few years ago)?
I’m a huge fan of DRIPs Rob with my discount brokerage because 1) they take any emotions out of investing and 2) I can see the power of money (more shares) compounding over time in front of my eyes – which is motivating.
All the best to you and thanks for your comment.
Great article on Drips as usual. It took me awhile to learn about these, but with your educational blog I am wiser and getting richer. Re: Enbridge: BMO discount broker advised they were not able to synthetically drip any longer as per their direction from Enbridge. I’m not sure if this is factual or not if other brokerages are still able to drip shares quarterly. As I have enough Enbridge anyways, I just redirect the cash dividend into buying something else when my cash account gets over $1k. Drips are nice that they can be automatic(or not) and takes the thinking out of day to day investing. Boosts confidence too and I sleep good knowing my money is always working for me!!
Thanks Bonnie. Always nice to hear that but you did all the work for your portfolio!
Yes, not all brokerages are created equal so I can appreciate BMO (among others) might not uphold any synthetic DRIP based on what the company decides to do with their own DRIP plan.
I know a few notable big time bloggers that don’t necessarily like DRIPs because they are not being strategic with the money/dividends. I don’t follow that camp since the CDN banks, pipelines, utilities and REITs are all companies I want to own more of over time.
Money working for you so you don’t have to = great!
Thank you for this article, Mark.
In response to Bonnie’s comments, I can confirm that TD Direct Investing offers a synthetic DRIP for ENB.
Great stuff JF.
The answer for US stocks DRIP at RBC is yes.
Thanks for that – thought so but didn’t want to assume!
Being one (and I am sure there are many others) who has achieved the goal of being able to “Live off our dividends”, I’ll not go through each point, but say that I believe achieving that goal will not be as difficult as many believe. Certainly one needs to save and save a considerable amount, but nowhere as much as the 4% rule suggests.
One of the pro’s not mentioned above is that an investor who follows such as strategy will likely see their income grow slowly and steadily as shown by Mark’s chart above. You see your income growth over time as well as how close you are coming to your income objective, without setbacks.
Good point cannew and yes, for sure, the 4% rule assumes you have a X portfolio value and can live off that. Thanks to the power of compounding, we can certainly see that more dividends produce more stock shares (when reinvested) and more shares therefore produce more dividends – thereby increasing the chance that income goals can be met without changes to the portfolio including selling shares.
I think right now, we have >25 stocks DRIPping at least one share every month or quarter. That’s pretty good I think.
How is your blog coming along? Will have to get over there. This blog is more than a part-time job for me!
Hi, Mark, I just found your blog and subscribed to your newsletter. You have some outstanding information! Thank you very much. I’ve learned a lot.
I have kind of specific question though, and not sure if you could guide me in the right direction. I just recently managed to make some good money and max out my TFSA. I did open a self directing investing account, but haven’t purchased any stocks or ETFs yet. It seems like a lot of people on the internet advise to hold cash for now, waiting for the inevitable market correction (which obviously may or may not happen, and who the heck knows when if it does). Is that a proper way to go about things? Should I just transfer money to a savings account, hoping that it would at least keep up with inflation or what other options would you suggest?
Great stuff Serge.
Well, I can’t offer direct investing advice but I personally use my TFSA as a retirement account (like the RRSP) to increase my dividend income and portfolio growth. I put money into the TFSA every January, and buy a few stocks that are a good fit for my portfolio. You can read about my thinking in these posts below:
In terms of lump sum investing (i.e., invest any cash all at once) or dollar-cost investing (i.e., limp in and invest smaller sums of money over time to try and get the best prices) there really isn’t a hard and fast rule. I intend to write about that on my site at some point and tell people what I do (invest when I have money).
I would definitely consider keeping your money in cash, for now, until you read up on investing and determine what your financial plan is before you purchase products. In a few months, you will have a better decision. Check out some books like Millionaire Teacher on this page for some excellent reading: