Why and How to DRIP: Dividend Re-Investment Plans

 

Dividends are the “tried and true” investment focus these days (other than dollar cost averaging through indexing, of course) for those that say “screw off” to mutual funds and want to DIY invest.  Dividend paying stocks USUALLY have a proven track record and continue to give you dividend income even if the entire market isn’t doing so well in general.  However, they are not immune and are vulnerable to the huge market swings even if their dividend payout is strong.

Dividend Reinvestment Plans, also known widely as “DRIPS” essentially help you automatically take the dividend income you receive and reinvest it, usually without having to pay commissions or fees.  For example, the dividend income your receive may not be enough to purchase an entire share, but will allow you to purchase fractional shares.  Over time, these fractional shares add up to one share.

Usually these plans are offered directly by the company, and they will have their OWN brokerage they use for the DRiPs.  You can also choose to use your own brokerage (for me, that’s Questrade) but you won’t receive the discount of the 3-5% on the recent three closing prices of the stock.

Basically, with Dividend Reinvestment Plans, you can “set it and forget it”.  This option is especially alluring for those who have the “buy and hold” mentality, and actually rewards those who like to buy and hold.  Or in my case, prevents those who ideally WANT to buy and hold from panicking and selling their shares for a quick profit (I tend to suffer from that problem).

What Are the Benefits to DRIPping?

The benefits to DRIPing are numerous and I find that they do outweigh the cons.  That being said, I currently only have one DRiP for an individual stock going on right now (but my TD e-series funds are DRiP’d regularly), but I would like to add more (just needs some organization on my part!).

Currently I am DRIPing EIF.TO in my Questrade TFTA and I plan to add FTS.TO and perhaps HSE.TO to the list of DRIP’ing dividend stocks.

PROS:

  • You’ll be investing and adding to your positions without having to pay fees or commissions
  • Certain Canadian DRiPs give a discount of up to 5% on the price of the equity (usually 3-5% discount) on the average of the price in the previous five days the stock was traded on the TSX (basically you only pay 95-97% of the regular price)
  • Compound interest is your friend over many years and much DRIPping
  • Oftentimes you can designate the number of shares you want to DRiP
  • Allows you to dollar cost average without having to put money in!

CONS:

  • Investing in dividend stocks is investing in individual shares and not a basket of multiple shares so it carries inherent risk
  • Inflexible at times- once you START a DRIP, you’ll often have to RE-APPLY for the DRiP for those new shares, if you ever add your positions to the dividend stock (so it’s merely annoying)
  • You won’t get to see that money add up nicely in your account because it will be automatically reinvested
  • Not all dividend paying stocks have DRiP available so you  need to check with the company website
  • You’ll still have to pay taxes on the dividend income (even though its reinvested and you won’t necessarily “see” it) if it is in a non-registered investment account
  • Sometimes certain brokerages do not allow for fractional shares to add up (like Questrade); therefore less compound interest for you!

How Do You DRIP?


It may seem really complicated but it’s actually pretty easy and straight forward to set up, especially if you use Questrade (though you don’t get the perks with that like 3-5% discount of the common share price).

DRiPing with Questrade

(I’m including this because a reader wrote in asking)

  • Read this page on Questrade about dividend reinvesting first 
  • Contact a Questrade representative (I called or chatted with them online) and ask about DRiPs.  They will send you an email with the form for the application.
  • Fill out the application and mail it back to Questrade
  • You may (will likely) need to call them back a week or two later to confirm they received your form and that your shares in the dividend stock will start DRiPing.
  • Note that with Questrade, there is no discount for DRiPing but the good thing is that there are no brokerage fees/ commissions (but this is the case if you DRIP’d directly with the company too)

DRiPing directly with the company

  • Check out the company’s webpage (e.g. I looked at EIF) for DRiP information and how to enroll (and check with your brokerage too!)
  • Fill out the form and send it to the company
  • See how much discount the company gives to the share price for DRiPing (usually 3-5%)
  • Decide if you want to do a monthly cash purchase plan (e.g. dollar cost averaging) if the company has it available
  • Sit back, relax, and enjoy the DRiP!

 Some great DRIP Resources

Here are some great websites to read up on to get you started on DRIP’ing.  Most of these are Dividend Blogs, understandably ;)

 

About

Young is a writer and former owner of Young and Thrifty and the main "twitter' behind Young and Thrifty's twitter account. She lives in Vancouver, BC and enjoys long walks on the beach, spending time with her anxious dog, and finding good deals. If you like what you read, consider signing up for email updates.

35 Responses to Why and How to DRIP: Dividend Re-Investment Plans

  1. We have Ameritrade and they won’t do this because then they’d miss out on their commissions. When I get to a certain threshold of dividend income (which I don’t remove from the account) I will reinvest it somehow, maybe accelerating it with an infusion of cash along the way.

    • @Money Beagle- I was doing that as well (well I usually do that). I’ve been DRIPing just one stock (EIF) and haven’t seen a friggin drip drop yet hahah.. I need to keep nagging at them, it’s been at least 6 months. Oh well. You get what you pay for. I don’t mind the saving up for a dividend income because then you can pick and choose which stock to buy instead of investing in the same stock.

    • We have TD Ameritrade, and they have an option for automatic dividend investing for all eligible stocks, which turns out to be all the stocks in my account that pays dividends. Or you can select individual stocks for DRIP.

      Is Ameritrade different from TD Ameritrade?

    • @Roshawn- I was a culprit (and admittedly, still am sometimes) of jumping into investments that they don’t understand. I’m really happy with the dividend stocks though, it “tames” the gambler in me. Somewhat.

  2. There is also a simple way to do it by using the Transfer Agents. It allows you to not pay any commissions and you can invest very little at a time. Computershare is one of the transfer agents and you can even do it with US stocks but I have not done it.

    I just setup my kids with it and waiting for the accounts to be setup.

    • @PIE- Thanks for the tip! I have heard a lot about compushare but haven’t looked into it. I’m a newbie DRIP-per, that’s for sure. I’ll definitely look into this transfer agent business when I get the chance.

    • @retirebyforty- For me, the only downside with reinvesting it is that I don’t always time the market well. With DRIPs it is reinvested regularly for dollar coast averaging in a minute scale, I suppose.

    • @Steve- That’s what I’ve found anyway. I have yet to see my first DRIP’d share though! I’ll be sure to let everyone know about it when I see it haha. That will be an exciting day for sure.

  3. Thanks for the explanation, very clear indeed! I’ve never set up a DRIP myself although I’ve known about them for a long time.

    It’s also very clear that some brokers (especially Questrade!) doesn’t give you the standard discount for DRIPs set up through them – you mentioned it at least 5 times in your post – haha.

    Anybody who reads this article, attempts to set up a DRIP, and doesn’t get the share price discount definitely won’t be able to say they weren’t warned. Even skimmers must have caught it at least once :)

    • @SavingMentor- Hahaha did I mention that Questrade doesn’t give you the standard discount for DRIPS?

      I hadn’t realized I wrote that so many times. Like a broken record lol.

  4. I don’t do DRIPs, but this was a great post and you explained DRIPS very well! Here is one more item to add to your “CONS” list:

    - When doing DRIPs you may end up buying shares when they are overvalued.

    As you know stock prices fluctuate, for example if you bought shares in XYZ at $20 because the shares were undervalued, and you started a DRIP. Overtime the share price could go to $25, $30, or $55 but the automatic process of DRIPing would still have you buying shares in XYZ now at $55. Personally I like to buy low when shares are undervalued. I don’t like to buy shares when they are overvalued. I would rather collect the dividends myself from XYZ and re-invest them into another company which would undervalued at that time.

    • @Kanwal- That’s very true Kanwal. Does any of the hard-core DRIPpers have a solution to this dilemma? I agree with you and that’ sprobably why I’ve had hesitation in the past to convert all my shares into drips.

  5. Oh yah! Dividends, now I’m excited LOL :) Thanx for the mention btw!

    Just to clarify things here for people who are new to DRIPs (Dividend Reinvestment Plans) there are two types of DRIPS – “synthetic” and “Full” DRIPs.

    When you have stocks with your discount broker, and reinvest the dividends – this is called a “Synthetic” DRIP. Your discount broker will usually only reinvest your dividends in full shares. So if you don’t have enough shares to create enough dividends to purhcase at least one share, you won’t be able to “synthetic” DRIP with your discount broker. Not for the small investor. You can also “synthetically” DRIP shares in a TFSA or RRSP.

    “Full” DRIPs as Passive Income Earner points out, are much more complicated and done through whats called a transfer agent, such as computershare. The beauty of “Full” DRIPs is that you can start off with as little as one share, and reinvestment dividend income in partial shares. But it involves a lot of paper-work, is more complicated, and you still need to get one share to do it. Currently you Cannot do a full DRIP in a registered plan in Canada (unless its part of an employer plan).

    Anyway, I’ve got a few DRIP articles on the archives page of my site, and both the Passive Income Earner and My Own Advisor also cover it.

    Cheers
    Dividend Ninja

    • @The Dividend Ninja-You’re welcome. Thanks for the clarification! That’s very helpful and much more clear :) I am learning from the DRIP masters!

  6. Dividend invest sure is great in a low yield environment, but at the same time that makes me wonder what will have once rates rise and are more high quality high yielding assets; those dividend stocks could face massive corrections in their stock price.

  7. DRIP’s have always appealed to me but I like the lessened risk of index funds. When you buy individual stocks your risk goes up like you said. I think once my portfolio gets larger, I will look into other options. Right now I am staying put.

    • @Miss T- I like index funds too. I keep promising myself that I will just index most of my portfolio but the adventerous side of me likes dividend stocks. :(f

  8. DRIPs and DRIP statements are like financial love letters to me!

    Kidding aside, yes, to clarify, there are 2 types of DRIPs: full DRIPs with transfer agents and synthetic DRIPs with discount brokerages.

    Ninja covered that nicely so I won’t go on.

    Kanwal has a good point as well, you might be “buying high” with DRIPping but then again, you can also take advantage of buying low.Think of it as dollar-cost averaging for stocks.

    In the end, DRIPs are a nice auto-pilot plan and so for me, I can turn my attention to the rest of the cash in my brokerage account and buy new shares in new companies.

    Y&T, thanks very much for the mention as a great Canadian DRIP resource.

    I am more than happy to help folks out where I can!

    Cheers,
    Mark

    • @MOA-Thanks for the clarification! Haha, financial love letters! The only time I got a real financial love letter was when I got a $20 gift card from KEG.UN.TO for the Keg Steakhouse. That was the best financial report. Ever. Hands down. lol.

  9. I don’t own any individual stocks, but I do let the index funds in my Roth IRA and my 401(k) re-invest automatically. I’m still on the fence as to whether I will let the index funds in my taxable account re-invest automatically or not. I still have some time to think on that since the index fund I am planning on buying shares of in my taxable account (Vanguard Total International Stock Market Index) only pays out dividends in December. So plenty of time to think :)

  10. I DRIP in my registered accounts. I have full DRIP through the Canadian Shareowner’s association low cost investing program. It is great !

    I also have a synthethic drip through BMO Investorline. Some of the shares I do actually received the discounted price that the company offers. For example I hold Inter Pipeline and the reinvestment price through my broker is the same as the price listed on Inter’s website as the discounted price. I don’t receive the fractional shares and the left over amount just goes into the cash part of the account.

  11. I have been a lifelong ‘DRIPPER’ starting with 400 shares of RBC in 1974. This position has grown to over 5000 shares through DRIP’s and splits.

    I am amused by the comments suggesting the Cons of reinvesting because you may be buying shares at a high price. My experience would be that many times you are reinvesting at a low price as well and it all comes out ‘in the wash’! Of course, I am not intelligent or nimble enough to predict these highs and lows, so I just let the markets ‘dollar cost average’ for me.

    For a long term investor, the major (and maybe the only!) consideration should be the sustainability of the dividend. After all this is what will provide income in retirement when your positions have been established and you stop reinvesting the dividend income. I retired last year and now enjoy over $100,000 of tax-advantaged dividend income.

  12. this is a new subject for me and have been reading about drips (and even went to see a Canadian Drip expert Derek Foster speak on the subject). thanks for your post. i signed up, based on advise from friend, with questrade as well, but now i see that you can not get the discount reinvest price with them. why is that? and also, maybe that means dripping with questrade is not a good idea?

    gratz on your $100 cheque :D

    • Read Derek Foster’s books high hopes and they’ll tell you about the differences involved in a synthetic dripping vs the “authentic” version. You have to order at least one share of the company to set up a natural DRIP, whereas several discount brokerages offer synthetic drip programs. I’m more of an ETF guy myself to be honest ;)

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