I plan to put my RRSP on auto-pilot over the next few years as I start to run out of unused contribution room. One of the first steps to simplify my portfolio was to set up a synthetic DRIP or dividend reinvestment plan. This process allows you to reinvest your dividends commission free instead of collecting them as cash.

Unlike a regular dividend reinvestment plan, where investors have the ability to purchase partial shares, a synthetic DRIP will not allow you to buy fractional shares in a company. A traditional DRIP is tricky to set up – it involves buying at least one share in a company and then paying to acquire an actual share certificate (paper form). Then you fill out a form and send it to the company’s transfer agent to enroll in the DRIP program.

Related: How to set up a DRIP

A synthetic DRIP is a lot less trouble. I just called TD Direct Investing and asked to have all my stocks enrolled in the DRIP plan. Not all of my stocks qualify, either because the company does not offer a DRIP program or because I don’t receive enough dividends to purchase at least one whole share.

Here’s how a synthetic DRIP works:

Let’s take Bell Canada (BCE) for example. I own 80 shares and the company pays a quarterly dividend of $0.6175 per share. That means each quarter I’ll receive a dividend of $49.40 from Bell.

The stock currently trades at $48.96 so the synthetic DRIP will automatically purchase one full share of BCE and then deposit 44 cents into my cash account.

If the stock price goes over $49.40 then it will no longer qualify for the synthetic DRIP and the dividend will be paid out in cash.

Another stock that qualifies (barely) is Emera (EMA). It pays a quarterly dividend of $0.3625 per share so 100 shares pays $36.25. The stock currently trades at $35.47.

Related: Dividend investing – Getting started

In my portfolio, only six stocks currently qualify for the synthetic DRIP program – Bell, Emera, Liquor Stores, Suncor, Telus, and TransCanada Pipelines.

Final thoughts

I like that I can use a synthetic DRIP to slowly add shares at no additional cost. Eventually I’ll consider setting up the classic DRIP program to take advantage of fractional shares and discounted share purchase plans.

Do you have a DRIP program in place for your dividend stocks?

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18 Comments

  1. Charles Slegtenorst on April 21, 2014 at 6:12 am

    Hi,
    You may want to mention that several companies that offer DRIPS also discount their stock price by 2 – 5% when enrolling in their DRIP program. Charlie

    • Echo on April 21, 2014 at 8:23 am

      Hi Charlie, that’s a great point. If a company offers a discount then TD said it would pass that on to me.

  2. My Own Advisor on April 21, 2014 at 6:27 am

    Nice post and you have company with DRIPs Robb 🙂

    I use DRIPs for most of my RRSP, TFSA and non-registered holdings. Synthetic DRIPs are a great way to take the emotions out of investing, it gets your money working for you and you don’t need to make any decisions about it. Just let the solid companies you own, make money and let it become reinvested month or quarter after quarter.

    I learned a long time ago, money that makes money makes more money.

    I think more investors should take advantage of enrolling their accounts and individual holdings in DRIPs if they qualify.

    I used to run a number of full DRIPs with stock transfer agents but I gave that up after I owned enough shares to run a synthetic DRIP with my brokerage. I did that for about 4 companies for a few years and no longer have any full DRIPs.

    Mark

    • Echo on April 21, 2014 at 8:28 am

      Hi Mark, I didn’t know that you no longer have any full DRIPs set up. I was considering it for my bank holdings, since I’m nowhere close to receiving enough dividends for one whole share.

      I like that the DRIP gets your cash working for you faster than if it’s just accumulating in an account.

  3. Loonie Lover on April 21, 2014 at 7:30 am

    I set up a “real” DRIP once, and, yes, unless you like paperwork, it’s not a lot of fun to jump through all those hoops.
    It seems to me that once you have a certain amount of money, a synthetic DRIP is the better option because of the relative ease with which it can be set up. I get your point about fractional shares, but aren’t those of more importance for those with relatively little money to invest? That’s how I’ve always thought about it, anyway.
    Kudos for automating the process, and taking emotion out of the equation.

    • Echo on April 21, 2014 at 8:31 am

      Yes, the process looks a bit daunting and I prefer to automate where possible. As I said above, I’d consider it for my bank holdings because I won’t have enough shares to qualify for the synthetic for quite some time.

  4. schultzter on April 21, 2014 at 7:33 am

    This is great advice. All my registered accounts are set up with synthetic DRIPs (as much as possible). I considered company DRIPs but the complication involved wasn’t worth it; the discount wasn’t that obvious (is it applied to average price, a particular closing price, etc.); and fractional shares a nuisance. By going using the synthetic DRIP you get none of the hassles and the most important benefit: no fees!!!

    • Echo on April 21, 2014 at 8:32 am

      Hi schultzter, that’s what I was going for – no hassles and no fees!

  5. Dan @ Our Big Fat Wallet on April 21, 2014 at 7:57 am

    This is a good idea. I’m planning on setting this up for my sister. She has a company pension so not a ton of RRSP room but enough to set up a small portfolio. The plan is to buy dividend stocks when the values are attractive and DRIP them all. Unlike myself, she isn’t into investing at all and would rather ‘set it and forget it’ – DRIPs are perfect for that scenario

    • Echo on April 21, 2014 at 8:43 am

      Hi Dan, that’s my plan going forward. After I contribute the rest of my unused room (about $16k) then I’ll only generate about $3k per year in contribution room for my RRSP. The portfolio spins out about $4k in dividends each year. I’m hoping the synthetic DRIP will eventually take care of half those dividends and make it automatic.

  6. Robert on April 21, 2014 at 4:05 pm

    I had an old-style DRIP for some time. I can’t say the paperwork was any big deal. However once the synthetic drips came available I went in right away. My primary reason was to consolidate all my holdings into the TD brokerage. Much easier to manage and re-balance in one place than individual drips. The small amounts not reinvested as a result are beneath consideration.

    DRIPS are not for everyone and every stock. They make less sense if you do not want any more of that share, although I found one exception. With the discount on my Riocan shares now exceeding nicely my transaction costs, I actually let the DRIP run and regularly cash out the shares over my target number. For example, suppose I want only 8,000 Riocan shares and already have that. If I receive 35 shares via DRIP every month, and save about $30 on the DRIP discount price, after 4 months I have saved $120 on discounts, I can cash out my 140 shares extra which costs me only $10 commission. That is $440 per year extra vs taking my shares out of the DRIP.

    • Echo on April 22, 2014 at 7:31 am

      Hi Robert, that’s a nice deal with RioCan!

  7. Financial Uproar on April 21, 2014 at 10:47 pm

    Not that I invest in a lot of stocks that offer DRIPs anyway, but even if I did, I would take my dividends in cash.

    Generally when I buy a stock I’d buy it in a certain range. Take my purchase of Reitmans. I paid something like $6.20 per share, but I probably wouldn’t buy it at much above $7 per share. I would rather invest the dividends into something that I thought had more potential, rather than blindly plowing it into a stock that is (hopefully) going up.

    I like the flexibility of the cash. I don’t like blindly buying shares of something I already own.

    • Echo on April 22, 2014 at 7:37 am

      Hi Nelson, that was my initial reason for collecting dividends in cash – so I could control the entry point for my next stock purchase. Now I think there might be more benefit to automating the process. An interesting observation is that, given my relatively small positions in most stocks, once the stock price rises too high it will no longer qualify for the DRIP plan.

    • Canadian on May 24, 2014 at 11:53 am

      I see the merits of taking cash dividends but I prefer to DRIP because of price fluctuations. If a stock continues climbing higher, I’ll gladly DRIP shares at higher prices because it means that over time I own more of an appreciating asset. If the price goes down, the DRIPs lower my cost base – this is particularly useful in registered accounts where the losses are trapped.

  8. Mclain on April 22, 2014 at 7:06 am

    I take my dividends in cash as well. I then have the flexibility to do what I want with that money.

  9. Richard on May 19, 2014 at 10:16 am

    It’s worth remembering that the stock price mostly doesn’t affect the ability to have a big enough dividend to re-invest. I saw a forum post once where someone listed “stocks under $10 that make it easier to DRIP”. But if the dividend is 1% per quarter, then you need 100 shares to be able to re-invest that dividend. It doesn’t matter if the shares are $5 each or $180,000 each (if Berkshire ever starts paying a dividend!). The only times when it matters, like in your example, is if the price changes quickly right before you get the dividend.

    I’m also not concerned about the change that doesn’t get re-invested since we can only buy whole shares. No one is really hurt by not re-investing $10. And the next time you add cash to the account you can use that change to buy more shares.

    Not using a DRIP can easily become a problem though. It takes a very disciplined investor and a lot of research to make the perfect decision every time you get a dividend. A DRIP is far easier and close enough to the right decision.

  10. Artur on November 5, 2016 at 11:59 am

    Hi,

    Love reading the blog when time allows. I am wondering if you are aware of any web sites where I can track simulated portfolios, and even back date purchase date. I am aware of Google and Yahoo Finance, but they don’t do DRIP, but rather put dividents into cash. I’d prefer the former for my purposes. Globe and Mail has one, but I believe you have to pay for subsciption to get it.

    Thanks in advance.

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