DRIP stands for Dividend Re-Investment Plan. It is the corner stone of Dividend Investing as it allows your portfolio to re-invest the dividends and provide compound growth for your investments.
No hypothetical compound growth from markets either since you can look at it just like you would when you look at interest. You can extrapolate what you would earn 5 or 10 years from now and you can even throw in some dividend increase as well. The different is in the tax rate.
Related: The Magic of Compound Growth
DRIP have done wonders to my accounts. My dividends grow by approximately 10% annually without adding any extra capital. The shares bought plus the dividend growth are all at work.
DRIP Account Options
Company or Full DRIP Plan
Company DRIP plans or Full DRIP plans are usually managed by a transfer agent such as Computershare or CST Trust Company. There are others in the US managing company plans but those are the most popular. ShareOwner is another way to purchase shares and benefit from fractional shares as I just recently found out. You can read some details over at Dividend Ninja.
What is important to understand is that those services are not real-time brokers. They allow you to purchase shares at specific times usually monthly or quarterly. All of these services provide investors with fractional share tracking. When you start investing and your funds are low, fractional shares are really good. All your dividends are always re-invested with fractional shares. Those fractional shares are put to work for you and will earn you fractional shares over time.
One point to consider is that the transfer agents do not support investing in tax-sheltered accounts. All your investments will be taxable. You can, however, transfer shares to discount brokers if you wish at any point.
There is an expensive way to get setup with transfer agents and there is a cheap way. The cheap way is to have someone transfer a share to you. It’s actually free except for the price of the share. On the DRIP Investing site, there is a forum you can use where many reliable investors will transfer a share to you with a $10 thank you. The thank you money is to simply cover the time and mailing fees needed. I acquired my 11 shares that way starting with one to test the process.
- Step 1. Decide on the stocks you want. Use this Canadian list and do your research.
- Step 2. Find someone to transfer a share to you. Use the forum to make contact.
- Step 3. Send payment as agreed and wait.
- Step 4. Once you receive the share certificate, you can then open the account and set up your credentials.
It’s important to note that you don’t decide on the purchase price. It’s always the market price when you buy your shares.
With the transfer agents, you can participate in the OCP (Optional Cash Purchase) are specific intervals to contribute extra funds. If you are setting up your kids, think about the minimum required for OCP as some might be too high for your taste.
The synthetic DRIP is a way for discount brokers to re-invest your dividends. There are some points worth noting.
- Only full shares will be purchased. It means that you need to earn enough dividends to buy a full share at the time of the dividend payment. When you have holdings in the $100 price range, you might need a lot to buy one share. I like stock splits because my dividends can more easily be re-invested.
- You can DRIP in all of your accounts; non-registered, TFSA, RRSP and RESP. (Full DRIP is limited to non-registered)
Questrade is currently the discount broker I would recommend for new investors. If you need to change later down the road, it’s pretty easy to transfer all your shares in kind – I did that. Many of the big bank discount brokers require you to have $50K in holdings to minimize your fees.
Many companies offer a DRIP discount on shares. When investing through transfer agents, the discount is always applied but it’s important to check with your discount broker to see if they will offer the discount.
The following is a pretty good list of the Canadian companies and their discounts. When a discount is offered, it ranges between 2% and 5%. A 5% is a really nice discount on your purchase price. You can an immediate 5% profit!
DRIPs With US Corporations
Buying US companies to DRIP is possible but you need to be aware of the tax implications. I tend to hold all of my US holdings in my RRSP as Canadians have a tax agreement on dividends when invested in your RRSP. We pay no taxes otherwise there is an automatic 35% withholding rules.
The process becomes a little more involved as you also need to have US banking accounts. On the resource sites and forums I have provided, there are detailed instructions on how to do it if you really want to be set up with US companies.
Kids & DRIP
I have both my children set up with DRIP to teach them about investing and to show compound growth. At their age, it’s not like they understand all those terms, but as they grow and learn more math, the compound growth is something we can start talking and I can show their dividend history over time compared with their contribution.
With annual contributions, which I match, they can think about saving and seeing their investment grow. By the time they are adults, years will have been at work. I hope to teach that time is a really important factor.
Related: How To Transfer Shares to Your Kids
You do receive a tangible paper share that your kids can hold and look at. It makes having a conversation about companies and investors a little simpler while still being a complicated topic.