What is the meaning of DRIP for investors? What is a DRIP in investing?
DRIP is the short acronym for Dividend Reinvestment Plan. Reinvesting dividends is a simple yet powerful concept that employees with stock purchase plans (ESPP) or DIY investors can leverage to build a dividend growth portfolio. There are two types of DRIP investors can leverage:
- Full DRIP – This approach implies that all pennies you received from the company’s dividend is re-invested and fractional shares are tracked. With individual stocks, this is only possible through a transfer agent.
- Synthetic DRIP – This approach is provided by discount brokers, and only full shares can be purchased and added to your account.
With both types of plans, DRIP simply means that you can put your money to work and watch it grow.
DRIP Plans
These plans are offered by the corporation and approved by the board of directors of the public corporation and offered to shareholders. Most plans are similar in that they allow shareholders to purchase shares (including fractional) with the dividend cash received by the company.
In most cases, these plans are managed by transfer agent companies such as Computershare, CST Trust Company or Valiant Trust. The transfer agents will manage the account on behalf of the company you are investing in.
Both plans below will allow investors to not only put compound growth at work but also apply a dollar-cost averaging approach.
Full DRIP with Transfer Agents
- Cash dividends can be reinvested to purchase shares (including fractional)
- Some corporations will provide a discount on the shares purchased
- Some plans will allow you to make optional cash purchases (OCP) at little to no commission
- When available, the optional cash purchase can have a minimum and a maximum
Fractional and discounted shares can pay off over time. It accelerates the compound growth of DRIP investing.
By default, the dividends are fully re-invested, but you have the option, in some cases, to have it paid out in cash.
Synthetic DRIP with Discount Brokers
- The dividend is paid and deposited in your account.
- Discount brokers acquire shares if enough money is present and deduct the cost of the share.
- Discounts from corporations can be applied, but it depends on the discount broker.
Starting a synthetic DRIP is as simple as asking your discount broker to start re-investing your dividends. In some cases, it’s all-or-nothing. With an all-or-nothing discount broker, it means that all dividends from every holding in the account will be re-invested if they meet the full share requirements.
DRIP compounding is available within any account (RRSP, TFSA, FHSA, RESP), and some discount brokers support the discount offered by the dividend re-investing plans.
DRIP Example
Let’s take Fortis, for example. It’s a Canadian Dividend Aristocrat, and it has increased its dividends for many years. Imagine that you invested in Fortis 20 years ago and had your dividend reinvested. You would have the following benefits:
- Full and/or fractional shares are purchased every quarter
- A discount of 2% on the shares purchased
Below is a table showing you the difference between fractional shares and full shares. After 20 years, you end up with eight more shares simply by leveraging fractional shares. If you do OCP, it also buys fractional shares for you. Over time, it can add up. The table below assumes you buy once and let compound growth work.
| Year | Price | Value | Shares | Fractional Shares | Full Shares | Dividends | Dividend / Year |
|---|---|---|---|---|---|---|---|
| 1990 | $5.41 | $5,000.00 | 924.000 | 0.000 | 0 | $0.00 | 0.363 |
| 1991 | $5.97 | $5,858.16 | 981.266 | 57.266 | 57 | $341.88 | 0.370 |
| 1992 | $6.13 | $6,380.68 | 1,040.895 | 59.628 | 59 | $365.52 | 0.373 |
| 1993 | $7.16 | $7,853.55 | 1,096.865 | 55.970 | 55 | $400.74 | 0.385 |
| 1994 | $5.44 | $6,411.17 | 1,178.525 | 81.660 | 81 | $444.23 | 0.405 |
| 1995 | $6.81 | $8,523.68 | 1,251.641 | 73.117 | 73 | $497.93 | 0.423 |
| 1996 | $8.50 | $11,177.16 | 1,314.960 | 63.318 | 63 | $538.21 | 0.430 |
| 1997 | $10.50 | $14,385.66 | 1,370.063 | 55.103 | 55 | $578.58 | 0.440 |
| 1998 | $9.56 | $13,714.33 | 1,434.553 | 64.490 | 64 | $616.53 | 0.450 |
| 1999 | $7.85 | $11,910.38 | 1,517.246 | 82.692 | 82 | $649.14 | 0.453 |
| 2000 | $9.00 | $14,353.14 | 1,594.794 | 77.548 | 77 | $697.93 | 0.460 |
| 2001 | $11.74 | $19,468.45 | 1,658.300 | 63.506 | 63 | $745.57 | 0.468 |
| 2002 | $13.13 | $22,577.76 | 1,719.555 | 61.255 | 61 | $804.28 | 0.485 |
| 2003 | $14.73 | $26,223.22 | 1,780.259 | 60.704 | 60 | $894.17 | 0.520 |
| 2004 | $17.38 | $31,902.24 | 1,835.572 | 55.313 | 55 | $961.34 | 0.540 |
| 2005 | $24.27 | $45,627.73 | 1,880.005 | 44.433 | 44 | $1,078.40 | 0.588 |
| 2006 | $29.77 | $57,227.37 | 1,922.317 | 42.311 | 42 | $1,259.60 | 0.670 |
| 2007 | $28.99 | $57,304.26 | 1,976.691 | 54.374 | 54 | $1,576.30 | 0.820 |
| 2008 | $24.59 | $50,583.51 | 2,057.076 | 80.386 | 80 | $1,976.69 | 1.000 |
| 2009 | $28.68 | $61,136.31 | 2,131.671 | 74.594 | 74 | $2,139.36 | 1.040 |
| 2010 | $33.98 | $74,821.64 | 2,201.932 | 70.261 | 70 | $2,387.47 | 1.120 |
| 1,277.932 | 1,269.000 |
As you can see, when you start, the fractional shares can help accelerate your portfolio. If you were really young and slowly adding a couple of hundred dollars a year, the fractional shares can matter.
Using DRIP through a transfer agent is the best way to educate young adults about investing and getting them started. There is no way they can be tempted to quickly sell or buy or to be obsessed with technical analysis.