Many companies offer a DRIP, or dividend reinvestment plan, which permit stockholders of record to buy additional shares directly from the issuing company with money earned from dividends, instead of receiving the dividend in cash. Most DRIPs are free of charge while some charge a nominal fee for reinvestment.
A DRIP is a great way to build up your investment portfolio, especially when you are just starting out and your holdings are small, without incurring brokerage fees or waiting to accumulate enough money to buy more shares. They also enable you to take advantage of dollar cost averaging.
With a DRIP, you must buy at least one share of stock in your chosen company. You can buy directly from the company, your broker, or use a transfer agent such as Computershare to buy your one share from someone who already holds shares and is willing to sell to you.
There are 2 ways you can set up a DRIP.
You must have the share certificate registered in your own name. Contact your chosen company by linking to the shareholder relations department. Ask for a DRIP application and a prospectus which will provide all the details about the program including fees.
A classic DRIP allows you to purchase fractional shares.
This type of DRIP is set up through your brokerage account, usually at no cost. You must make your purchase from their own list of participating companies. They have hundreds to choose from so it shouldn’t be a problem.
A synthetic DRIP differs from the classic DRIP in that only whole shares are purchased with the dividends and the remainder is paid to you in cash.
Share Purchase Plans (SPPs)
The best Share Purchase Plans permit stockholders to send in periodic cash contributions to buy additional shares. The best plans also allow investors to buy shares at a discount to the current trading price often as high as 5 – 10%, which can add up to significant gains over time. Look for plans that don’t charge commissions on purchases.
Some discount brokerages, like Questrade will honour these discounts.
You must open a bank account in the US, not a Canadian US$ account.
Two accounts you can use are:
- Harris Bank (owned by BMO) to open a Harris Lion Power-Free Checking Account
- RBC Centura (owned by RBC) to open an RBC Access USA Checking Account
Send them a US$ money order to make your deposits and then you can purchase your US DRIPs online.
Here’s a list of “US Dividend” Champions.
DRIP for Kids
A DRIP is a great way to build a nice nest egg for children. They have a long time frame to smooth over any volatility. What child wouldn’t like to own a kid friendly company such as Disney or McDonalds?
Get a framed share certificate from Oneshare, Frame-a-stock, or GiveAShare.
Disadvantages of a DRIP
The main disadvantages of a DRIP are:
- The cost involved to get your registered paper certificate ($50-$100)
- It may be difficult to sell fractional shares
- You must keep accurate records of all purchases for tax purposes
- Only a handful of Canadian companies offer free DRIP and SPP plans.
Go to Canadian DRIP Primer for a list of Canadian companies that offer DRIPs.
Have you set up a DRIP in your portfolio?