DRIPping your way to wealth - The Globe and Mail (2024)

When stock markets sink as they did this week, you could flee to the safety - and slim returns - of bonds and guaranteed investment certificates.

Or you could do like Robert Gibb, and be a DRIP.

That's not an insult. DRIP stands for dividend reinvestment plan, and it's the cornerstone of Mr. Gibb's investing strategy. He's such a DRIP enthusiast, the tagline on his e-mails reads: "I DRIP therefore I'm … slowly getting rich I hope!"

"I've got something like 25 DRIPs on the go," the retired schoolteacher said from his home in Victoria. "I won't say I'm rich. but I'm very comfortable."

Stocks in his DRIP portfolio include most of the big banks, BCE Inc., Telus Corp., RioCan REIT, TransCanada Corp., Enbridge Inc. and a handful of U.S. companies such as Coca-Cola Co. and Johnson & Johnson.

Why Do The Drip?

When you open a dividend reinvestment plan, your dividends are automatically invested in more shares of the company. As the Investment Reporter newsletter noted in a recent issue, DRIPs offer several advantages:

"DRIPs let you profit from dollar-cost averaging in volatile times like these," it said. "Since DRIPs are automatic, you reinvest when you should, as prices fall."

DRIPs reduce brokerage fees. In addition to letting you reinvest dividends without paying commissions, many companies have share purchase plans that allow you to acquire additional shares with no transaction fees.

DRIPs take advantage of compounding. They also get your dividends working immediately, instead of letting cash sit idly in your account.

DRIPs force you to save.

Many companies offer discounts on shares purchased via a DRIP.

Different Drips For Different Folks

If you have a trading account, the easiest way to start a DRIP is to call your broker and enroll your shares in its reinvestment plan. Your broker can provide a list of stocks that qualify.

The downside of most broker-operated DRIPs (also known as "synthetic" DRIPs) is that they reinvest only in whole shares. For example, if you get a $50 dividend from a company whose stock is trading at $40, you'll acquire one share and get the remaining $10 in cash.

One exception is full-service broker Edward Jones, which permits fractional share purchases. A DRIP "eliminates the emotions that can get in the way of making the right investment decision," said Scott Pelton, a financial adviser with Edward Jones in Toronto, who uses DRIPs with several clients.

In volatile markets, "a dividend reinvestment plan helps keep their money working hard toward their long-term financial goals."

Another way to get all of your dividends working for you is to open a "true" DRIP directly with the company's transfer agent. These DRIPs allow you to acquire partial shares, so your $50 dividend would buy 1.25 shares of a $40 stock, giving you the full benefits of compounding.

There is more work and some upfront costs involved in setting up a "true" DRIP, but enthusiasts such as Mr. Gibb say it's worth the trouble. Another reason to go this route is that many companies offer a discount on shares purchased through their DRIP. Check with the company, as these discounts often change.

Opening A 'True' Drip

The first step is to buy at least one share of the company through your broker, who will charge you a commission. Next, ask your broker to register the share certificates in your name. Most discount brokers charge an additional $50 to register the shares, which includes the cost of mailing the certificates to you.

(If you want to cut your costs to the bone, it's possible to acquire your initial share or shares from another investor through a private exchange, but it is more work and there is some risk involved since you have to trust a stranger. You can read more at www.dripprimer.ca.)

Once you have the certificates, contact the company's transfer agent and ask to enroll in the dividend reinvestment plan. You can find contact information, as well as a description of the DRIP, in the investor relations section of the company's website.

Every quarter, you'll receive a statement from the transfer agent that documents your purchases and updates your holdings. It's important to keep these documents for tax purposes.

Remember, you still have to pay tax on your dividends, even though they're being reinvested. The good news is that dividends are generally taxed at a much lower rate than interest.

Hassles And Headaches

Some investors say the cost savings from DRIPs aren't worth all the hassles, particularly since brokerage commissions have fallen in recent years.

The biggest headache with DRIPs is tracking your adjusted cost base (ACB), which you'll need to calculate your capital gain or loss when you eventually sell all or part of your shares. Because you're reinvesting dividends at different prices, your ACB is always changing.

Using a spreadsheet or updating your cost base quarterly with a pencil and paper can minimize the stress. Mr. Gibb uses Quicken to track his DRIPs and says the effort is well worth it.

"It's a get-rich-eventually scheme," he said. "I'm not a millionaire yet but it's not far away."

A sample of Canadian companies with dividend reinvestment plans and share purchase plans. Discounts apply to shares acquired with reinvested dividends only.

Some Canadian DRIPs

* paid in bonus units