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.
- 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!
- 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)
- 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!
While Dividend Reinvestment Plans (DRIPs) are still a great way to slowly-but-surely build a solid investing portfolio, I would be remiss if I didn't write a bit about how robo advisors have really come in and shaken up the DRIP scene. Sure, it is still cheaper to to though a discount brokerage and use an “artificial DRIP” or actually order shares and do an authentic DRIP through one of Canada's large companies – but the extremely convenient hands-off nature of a robo like Wealthsimple is very appealing to a lot of Canadians. If you simply want your investments taken care of for you automatically, then a robo advisor is really the way to go. If you want the 2-5% savings that comes with authentically creating your own DRIP – and you don't mind doing the leg work yourself – then the extra effort might still be worth it for you.