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How To Set Up A DRIP

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.

Classic 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.

Synthetic DRIP

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.

US$ DRIPS

You must open a bank account in the US, not a Canadian US$ account.

Two accounts you can use are:

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?

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21 Comments

  1. Trevor on February 2, 2012 at 9:17 am

    This process seems awfully complicated. When I set up my investment accounts at RBC Direct they asked if I wanted to set up a DRIP, I said yes. Done. And ever since, all my dividend payouts have been automatically reinvested. There was no discussion of a registered paper certificate, synthetic vs classic, limited number of companies to choose from or anything like that.

    So, why was that so simple when the process you describe seems mired in paperwork?

    • Echo on February 2, 2012 at 10:23 am

      @Trevor – the DRIP you have set up at RBC Direct is a synthetic DRIP. From my understanding, when you said ‘yes’ to DRIP investing with RBC, all of your eligible dividend paying stocks were set up on a synthetic DRIP, you can’t pick and choose which stocks you want to DRIP.

      As Boomer described above, you can only purchase whole shares via synthetic DRIP. A classic DRIP allows you to purchase fractional shares, take advantage of DRIP discounts, and pick and choose which holding you want to DRIP.

      • Trevor on February 2, 2012 at 11:35 am

        Thanks. It’s so easily done to set up a synthetic DRIP, at least from my experience, that I wonder what practical advantage there would be to going to the trouble of a classic DRIP. I’m sure it does offer some further degree of control, I’m just not as sure that the effort would be equal to the payoff.

        • Boomer on February 2, 2012 at 12:15 pm

          Trevor, it’s almost impossible to take advantage of DRIPs through a broker (synthetic) if you are a small stockholder. For example, a popular company is Rogers Communications (RCI.B). 100 shares will give you a quarterly dividend of $35.50 but todays share price is $38.72 so you’d just get the cash into your account. A classic drip would give you approx. 0.9 of a share so you can gradually build up your holdings over time.

          Most brokerage drips are from mutual fund and ETF distributions.

      • The Passive Income Earner on February 2, 2012 at 7:22 pm

        With ScotiaITrade, you have to pick every company to that you want to DRIP; it’s not all or nothing. In fact, I have to email them to enroll every time I buy a new company I want to DRIP. I also get the discount on the DRIPs offered by the company. Questrade doesn’t but RBC Direct does and I believe most bank associated broker will give you the discount as well.

        The only difference between the plan and some broker is the fractional shares for me.

    • Maria on February 6, 2012 at 5:26 am

      What you are involved in is a synthetic drip. The disadvantage of that is when you start small and want to use your dividends to buy more shares. If the amount of the dividend is not enough to buy a share, you will never get more shares. It might be more complicated in the beginning, but for me it was worth it to set myself up for the classic drip. Those fractional shares build up into whole shares over time, making me more money:D

      • Maria on February 6, 2012 at 5:39 am

        If you’re also involved in the SPP you can send a cheque to the agent for whatever the minimum or maximum payment is per month or quarter, and buy more shares for free. No more brokerage fees!!

  2. SE Book on February 2, 2012 at 9:25 am

    I had not heard of DRIP fund. are they available in the states?

    • Boomer on February 2, 2012 at 10:41 am

      @SE Book: There are a lot more US companies that offer DRIPs and SSPs than Canadian companies. Go to the link above – US Dividend champions for a list. Either go through your chosen company or check with your discount broker for procedures – they should be similar to what I have described.

      • SE Book on February 8, 2012 at 2:41 pm

        Thanks for the info I’ll check out the link! It looks like I need to look into this a lot more.

  3. VanLarry on February 2, 2012 at 1:46 pm

    Most, if not all, discount brokerages, don’t do Share Purchase Plans.

    Also in Classic DRIPs, some companies offer a percentage discount. As mentioned, synthetic may or may not honor it.

    Don’t forget the tax implications. The dividend is taxed at that year. And you must adjust the total amount when you sell your shares and pay the tax for capital gain/claim tax for loss.

    One of the reasons why people don’t do DRIPs is the paper work involved.

    Although, it might be a great idea to transfer it to your child and instill discipline.

    • Boomer on February 2, 2012 at 4:16 pm

      @VanLarry: To buy more shares through your broker you will have to pay the commission (between $5 and $30). However, if you already have a drip in place some will honour the discount (if any). It doesn’t hurt to ask.

      Keeping track of the adjusted cost base is one of the disadvantages as mentioned. Set up a spread sheet – it’s easy to do, but takes time.

      • VanLarry on February 3, 2012 at 2:53 am

        Yea, setting up a spreadsheet isn’t hard or if you’re really traditional: pencil and ledger paper.

        I remember reading about a guy who’s plan was to leave it for the government to figure out the adjusted cost base. He would keep his DRIP going until his death.

        Not exactly a great plan btw. It’s whoever is in charge of the deceased estate gets the job of reporting the final taxes. For most people it would be the kids would have to do it. If a lawyer is in charge, I’ll bet there will be an extra service charge to hire an accountant to do it.

  4. Peter on February 2, 2012 at 9:18 pm

    TDW provides both individual stock DRIPs and all-stocks-in-the-account DRIPs. Some TDW DRIPs are synthetic DRIPs – operated by TDW, some are Treasury DRIPs – operated by the company itself. For every stock that we have DRIPs for, both synthetic & Treasury, the discounts are honoured.

  5. moosehead2000 on February 2, 2012 at 9:52 pm

    For those interested in DRiPs, there’s a website that is a huge resource of information as well as members who have single shares available to purchase and start your DRiPs. http://dripinvesting.org/

    • The Passive Income Earner on February 2, 2012 at 10:14 pm

      I second that. That’s where I got all my first shares, 11 of them total. It saves all the process of getting a share certificate through your broker. Now that I am setup, I started my kids on it too.

  6. Marissa on February 2, 2012 at 10:50 pm

    So turns out that I have this set up and didn’t know what it called. *Hangs head in shame

  7. ljhallan on February 3, 2012 at 1:02 pm

    How does one set up this spreadsheet to track dividends? Do you have to pay taxes on every dividend account (TFSA, RRSP and non-reg.) every year)? Any help would be appreciated.Thanks.

    • Boomer on February 7, 2012 at 11:35 am

      @ljhallan: http://www.thepassiveincomeearner.com has a good “how to” post on tracking dividend income. My spreadsheet is quite simple. I list all the stocks under each of my 3 accounts, how many shares I have and the original cost. Then I just enter the dividend amount monthly. At the end of the year it calculates my return.

      Only dividends on non-registered accounts are taxed. TFSA dividends are not taxed at all and RRSP dividends are taxed as ordinary income when you withdraw funds from the account.

  8. Joyce on November 20, 2013 at 8:56 am

    Why can’t I use my own credit union to set up a Drip account?

    And do these two banks require direct deposit?

    • Boomer on November 20, 2013 at 1:00 pm

      @Joyce: You can only set up DRIPs from the company you buy the shares from, or your broker or discount brokerage. You credit union may have access to a brokerage – check with them to see.

      Direct deposit is not required. If you are talking about the US banks above, you need to send them a US$ money order or wire funds directly to them.

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