The Average Persons Retirement Investment Plan is an easy to understand, simple way to invest. It allows you to make small investments over time and it does not require extensive market forecasting or analysis. You will also see your income grow over time, without commissions or fees. Cannew, a fan of My Own Advisor, outlined the use of Stock Transfer Agents and full Dividend Reinvestment Plans (DRIPs) in Part 1 of this series.
Today’s post will conclude Cannew’s get wealthy eventually strategy – one that earns him close to $100,000 per year in retirement income – in his own words.
What stocks to buy (for Dividend Reinvestment Plans (DRIPs))?
Personally, and of course the choice is always yours, I only consider large, stable, Canadian stocks for my full DRIPs. Here are my rules for DRIPping:
- The company stock must have paid a dividend for many years,
- The company stock must have a history of growing its dividend,
- The company must offer both DRIP & Share Purchase Plans (SPP)
- I want to invest small amounts at no commission.
Based on my screen there are only 28 stocks that meet my criteria. After further screening on other criteria such as dividend payout ratio and increasing cash flow, I find only eleven (11) companies that I feel offer me the best and safest results for long-term investing:
- Four banks: Bank of Montreal, Bank of Nova Scotia, Canadian Imperial Bank of Commerce and National Bank.
- Two communications: Bell Canada and Telus.
- Two pipelines: Enbridge and TransCanada.
- Two utilities: Emera and Fortis.
- One insurance: Sun Life Financial.
Each company has own requirements on the number of shares needed and the minimum amount to buy more shares within the DRIP:
Based on these requirements and dividend histories, I personally feel:
- CIBC (CM) has had a rocky financial history but a good dividend history,
- National Bank (NA) is an expensive DRIP to start, requiring 100 shares,
- Sun Life Financial (SLF) did not increase its dividend for six years after the financial crisis, and
- Telus (T) cut its dividend in 2002 but has had a good dividend history record since.
Based on this information I’ve decided to narrow my choices down to seven (7): BMO, BNS, EMA, FTS, TRP, BCE & ENB as my primary investment choices.
Like I mentioned in Part 1 send the share certificate to the Stock Transfer Agent with your Dividend Reinvestment Plan (DRIP) application, and as an option, a cheque with your DRIP application form to buy more shares sooner than later.
Relax. I mean it. You’ve set up your Retirement Time Capsule. Every month I encourage you to send a cheque to buy more shares commission-free but that’s up to you. It goes without saying the more you invest, the more dividends you’ll get paid. Going forward here are some things to be mindful of and think about when it comes to your full DRIP:
- Each year you will receive a T3 indicating the amount of dividends received for the year. The information will need to be included with your Income Tax filing. If your taxable income is less than $40,000, you will likely not pay any tax on the dividends paid. That’s good! When your earnings are $40,000 or more and you are contributing larger amounts, it may be time to open a Tax Free Savings Account (TFSA).
- You’ll need to track your adjusted cost base and here’s a simple calculator to help you.
- Consider opening a TFSA with Shareowners Investment Inc. as they provide Full Dividend Reinvestment (no affiliate with My Own Advisor) but you can always open your TFSA with your big bank brokerage. Be mindful other brokers only reinvest dividends to buy full stock shares (you won’t get fractional shares like you do with the Stock Transfer Agents).
- Once the TFSA is opened transfer most of the company shares in the DRIP to the TFSA but consider leaving at least 1 full share with the Stock Transfer Agent. Shares in the TFSA will now receive dividends and automatically be reinvested to buy more shares, also at no cost.
- By using the full DRIP and TFSA together, over time, I believe you accomplish two very important things: you continue to invest small (or large) amounts commission free and the money inside the TFSA is growing and compounding tax free. By investing as much as one can in the full DRIP then periodically transferring to the TFSA, you keep transaction costs low and limit taxes. (You can probably read-in I’m a huge fan of the TFSA and I think most investors should maximize their TFSA over their RRSP).
- I didn’t mention inflation yet, which will erode the value of money ($5,000 today will not buy as much in 10 years, even less in 15). Because you purchased a company stock that has a history of growing its dividend, your income should grow and keep pace or maybe beat inflation.
- In addition, if a company is growing its dividend, the price of the shares will also likely grow over time, usually in line with the dividend growth rate. This means you get income and price appreciation over time although nothing is ever guaranteed with investing.
On that note, is this method foolproof? Heck no! However building part of your portfolio where your income can grow (like Mark’s is starting to) over time may help offset some expenses in retirement.
Are these companies going to be around forever? Who knows! However I’m going to bet (and have with my own portfolio) that if some companies have paid dividends for decades or more, they will continue to do so. Also, nobody said you have to use all your life savings to invest with this method! Over time you can spread your investments amongst different companies, even some outside Canada if you wish although this has some tax implications and currency risk.
So there you have it, investing with Stock Transfer Agents using full Dividend Reinvestment Plans (DRIPs) for Canadian dividend paying stocks (Mark has an entire webpage dedicated to this, so check it out), and periodically transferring those investments to the TFSA to minimize fees and taxes.
I’m not a blogger and I don’t intend to become one. I hope you found my approach to investing understandable, one which will allow you to begin investing in dividend paying stocks with small amounts to increase your wealth over time. Using full DRIPs can be a great wealthy eventually plan because this approach can provide you with a growing income stream for when you decide to retire. I know, I’ve done this.
(Disclosure: Cannew owns all the stocks listed in this article except Sun Life).
My Own Advisor footnote: Thanks to Cannew for sharing his approach to wealth building on my site. As a final reminder, this is Cannew’s approach, it doesn’t have to be yours. Personal finance is personal. That means if you need help with your financial decisions, any of them, I strongly advise you to work with a financial professional. Thanks for reading.
What’s your take on full dividend reinvestment plans and the Retirement Time Capsule?