Today we have a unique show – dedicated to discussing one of our recent special reports from our Canadian Dividend Stock research on DRIPs or Dividend Reinvestment Plans. “DRIPing” can be a powerful long-term strategy – the key is to buy the right stocks, be prepared for a little DIY work, and get ready to get rich…slowly. Unfortunately, it is one of the least talked about financial strategies on Wall Street – Why? Because a DRIP can be set-up so investors pay no ongoing brokerage fees. If Wall Street isn’t getting a cut, then you are not likely to hear about it. For a long-term investor, DRIPs can be great – not only do you pay no ongoing broker fees, you can buy shares in some great companies at a discount to their price on the market (often 2-5%!). It’s like being a member of an exclusive investment club and it’s FREE.
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Now, let’s dig into the show.
I would like to welcome again, myhost, KeyStone’s Senior Equity analyst, father of 1, and a man by who does not know what news is more exciting this week, Gwen Stefani’s return to the Voice, the low ratings on this season’s Celebrity Apprentice, or Kevin O’Leary’s cross Canada Conservative Leadership tour!
KeyStone’s Take: “DRIPing” can be a powerful long-term strategy.
But DRIPs are not for all investors. In fact, if you do not like doing a decent amount of up-front do-it-yourself (DIY) work or have a short-term outlook, then you should probably find another strategy. DRIPing is DIY investing to the next level, but the benefits are real. In fact, after you have done the initial legwork, a DRIP portfolio is actually quite simple to maintain long term.
What is a Drip?
A dividend reinvestment program or dividend reinvestment plan (DRIP) is an equity investment option offered directly from the underlying company (the stock you are investing in). The investor does not receive quarterly dividends directly as cash; instead, the investor’s dividends are directly reinvested in the underlying equity.
Two Forms of DRIPs – (1) Regular & (2) Synthetic DRIP
(1)Regular DRIP/Share Purchase Plan (SPP)
The DRIP/SPP strategy is where an investor can purchase one or more shares of a participating publicly traded company, and have the dividends reinvested automatically.
The advantages are that investors can reinvest dividends without any commission fees and the ability to purchase partial shares with even the smallest of dividends. The downside is that it is a bit of a process to get started in the DRIP program, and there are limited companies that offer this option. In terms of Regular DRIPs, one negative is that you cannot use them under a registered account – TFSA, RRSP and RESP.
From a summary perspective the process is as follows:
(1) Find companies that offer the DRIP/SPP program then purchase your share or shares with your discount bro-ker.
(2) Call your broker and request a share certificate (fee involved). ?
(3) Mail certificate to the transfer agent. ?
2Synthetic DRIP (the second form of DRIPing).
The synthetic DRIP is a way for discount brokers to re-invest your dividends. There are a couple of distinctions between a regular DRIP and a typically synthetic DRIP that are worth noting.
• Only full shares will be purchased versus the fractional shares that can be purchased immediately in a full DRIP. For example; you own 10 shares in a stock trading at $100 per share ($1,000 value). The stock pays a 12.5% dividend annually. After one year receive $125 in dividends. Under a full DRIP your money immediate-ly goes to work and you get to purchase 1.25 additional shares (assuming the price is still $10 per share). Under a synthetic DRIP you buy one share for $100 and the $25 sits there for one year until you have enough to buy one more full share. This may not seem like much, but over 10-20 years it can really add up in missed returns if the stock performs reasonably well.
• Some discount brokerages do not honour the “share price discounts” offered under some DRIPs. This is another big minus.
• You can DRIP in all of your accounts; non-registered, TFSA, RRSP and RESP. (Full DRIPs are limited to non-registered accounts).
• The process is far simpler than a Regular DRIP – easier to sell and manage.
Not all DRIPs are Investment Worthy.
As we stated above, the most important element of any investment strategy is the quality of the investments (in this case stocks) you select.
Just because a company offers a traditional DRIP doesn’t make it a great investment. In fact, there are some companies offering DRIPS that we would not touch with the proverbial “ten foot pole.” You need to understand the business behind the company you are buying and why you are buying it; understand what you’re investing in at all times. THINK ABOUT IT – Would you buy a new car without a test drive? Would you buy a new computer without looking at the specs? A TV without looking at the picture or select a spouse without a few dates? If you answered “yes” to any of these questions, then DRIP investing is not the strategy for you. If you answered no, fortunately, there are a solid selection of good companies that happen to offer DRIPs in Canada – our Canadian Dividend Growth Stock Research is designed to help you find them.
How to Set-up a Full DRIP
Step #1 – Select Your DRIP Stock(s)
In the end, this is the most critical step in your DRIPing journey. You can set up a DRIP perfectly and take advantage of the low cost SPP associated with it effectively, but if the stock you have selected declines long term, all the cost savings, market discounts and compounding will amount to window dressing on a poor investment. While?we cannot guarantee you success, KeyStone’s prudent dividend growth stock research is designed to assist you in your journey to find potentially great long-term DRIP stocks. Whether you use our research or not to build a DRIP Stock Portfolio, we highly recommend getting some independent advice and research into the stocks you are looking to purchase before you make the most critical decision – which stocks to buy.
Step #2 – Open a Discount Brokerage Account (if you do not already have one)
While there are other methods to obtain one share through share exchanges for example and some companies will even let you buy direct, we find this is the simplest way to start. The set-up should be free and all the big banks have solid options including CIBC – Investor’s Edge, Royal Bank – RBC Direct Investing, TD Bank – TD Direct Investing, Scotia bank – iTrade Canada, and BMO – BMO InvestorLine, and there are a number of independents. We do find the Big Bank brokerages in Canada tend to have a better chance at honouring the “discount” offered under DRIPs in their synthetic DRIP offerings so one of them may be the better choice.
By using a discount brokerage you should be able to make your initial share purchase for $5-$30 and your only other fee should be payment for putting the shares in your name (in the range of $50) – other than a stamp here or there, that should be all you pay for setting up the DRIP.
We have seen others suggesting you buy 1 share or the minimum amount of shares the company requires for you to participate in the DRIP.
Step #3 – Buy the Stock Via Your Discount Brokerage Account
How many shares should you buy? This is really up to you for the most part and depends on how much you can afford to spend and whether or not you mind doing a little extra paper work. If you are thinking the process already sounds like a lot of paper work, then we suggest that if you have the budget and are serious about travelling down the DRIP journey long term, you look at making your initial purchase in any one DRIP stock in the $1,000 range at minimum ($5,000 plus is recommended). You have more control on the primary purchase price this way and may be able to take advantage of a market dip. This way you likely take advantage of lower initial trade fees in your brokerage account and have the “clout” to ask for the brokerage to wave the transfer of the shares in your name (the higher the balance in the account, the more power you have – $10,000 and above in most cases in terms of account value) and you do not have to initially bother with adding more money through the stocks SPP.
If you do not mind a little more paperwork, really like the idea of the share discount and dislike the idea of taking $5,000 to $10,000 worth of shares in your hot little hand, then you can often buy as little as one share. But not all companies will allow you to start DRIPing with one share, some have other minimums. Before making any purchase you can reference our Canadian DRIP list and find the Transfer Agent for the stock you are looking to buy. You need to determine the minimum amount of shares you have to buy to be eligible for the DRIP plan. In some cases it can be found on the Transfer Agents website, but you can always get it by calling up friendly people at Computershare or Canadian Stock Transfer Company for example, to confirm minimum purchase requirements. Remember, they are there to help you.
Step #4 – Have your Broker Transfer the Shares from Street Name to Your Name & Send them to You
You have made your buy and have 1 or more shares of your DRIP stock in your account. Remember to wait 2-5 business days to allow the purchase to settle. Then you can call up your brokerage and ask your discount broker to change your share from “street name” (shares with a discount broker are held in this manner on your behalf without your name on any physical certificate) to be registered in your name. You may face some resistance as the broker will no longer profit from your future purchases. Just be firm and it will be done. There likely will be a registration fee charged by the broker of $25 to $50 – you are within your right to ask this to be waived – you can reference your account size, term as a customer or anything that benefits you in this regard and you may not have to pay it.
As soon as the registration has been changed, contact the company or company’s trustee to request the DRIP and SPP enrolment forms. Some of the trustees or transfer agents have these forms online and some you will have to wait for them via snail mail. These forms do not take more than a couple of minutes to complete.
After the first reinvestment of dividends, you’ll receive your first DRIP statement. Then you can proceed to make SPP contributions – many times at a 2-5% discount to the market price!
Quick Tips on this Step:
• If the transfer agent makes forms available online – use them! The process will be far quicker and there is limited reliance on Canada Post.
• Ensure you tell your discount broker (online, phone or written) to print the share certificate in the same name you want to register your share with the transfer agent.
• Expect to pay money for the share to be made in “certificated form” in your name. As we stated above, the Big-bank discount brokers usually charge a fee of about $50 plus taxes or HST. Again, you are perfectly entitled to ask for this fee to be waived, but it may not happen.
• Expect the certificate to take 2 or 3 weeks to arrive in the mail.
Step #5 – Start company transfer agent paperwork to enrol the stock in DRIP and SPP
Here is where the fun paperwork with the stock transfer agent starts. We suggest you start by googling the stock transfer agent website and go to it to find the required forms to initiate your full DRIP and SPP. The DRIP Circular or the company or transfer agents’ website will tell you what are the correct forms, but we suggest you just dial up the transfer agent and have them talk you through it if you are at all uncertain – again, that is what they are there for. The transfer agent will confirm what forms you should be completing and help enrol in the DRIP and SPP.
The typical forms are as follows:
• The first associated with the dividend reinvestment plan; to state you want all fractional dividends reinvested. ?
• The second associated with the share purchase plan; to state you want to submit cheques to buy more stock. ?
• The third confirming this DRIP enrolment is not associated with any money laundering activities. ?
Step #6 – Mail Your Transfer Agent the DRIP and SPP Forms
You should now have your share certificate as you will need the share certificate number identified on it. Remember to handle this with care as it is a real share. Do not send it to your transfer agent. We suggest keeping it in a safe place. If it is a significant dollar amount, then keeping it in your safety deposit box is prudent.
Again, if you are unsure which number the share certificate numbers is on your share certificate, it’s a great idea to call the transfer agent. Mail your forms and letter directly to the address specified on the forms. It will take 2-3 weeks to get your share enrolled in the DRIP and SPP. You can give the transfer agent (they will know you by name) a call in 3 weeks to confirm that everything is running smoothly.
Step #7 – Send a cheque as part of your share purchase plan (optional cash purchase) and enjoy!
Now that your share or shares have been registered with the transfer agent, you will get some mail from them in return including a form called an optional cash purchase form.
Every month or quarter based on what the DRIP Circular or Plan Brochure will allow, you can write a cheque, complete this optional cash purchase form and mail the form with your cheque to get your stock purchases commission free. Some plans will allow you to set up direct deposit from your bank account (saving your stamp!) which you can turn off and on. As we have mentioned, you may also get those shares for a 2-5% discount from the market price.
Remember, you are not required to send any additional money through the SPP monthly, quarterly or annually. It is just an option you have to continue to add to your position in a stock – dollar cost averaging in overtime.
Depending on the company DRIP however, you must be careful to know the minimum purchase amounts required. Some stocks have no minimum, others have minimums of $100 and some companies are even higher.
After dividends are reinvested and/or each time your cheques are cashed, you will receive a statement from the transfer agent with transaction details. You will continue to receive regular statements detailing your holdings for each company you own as long as your stocks stay in the DRIP with SPP. Keep all statements/records for tax purposes.
You’ll need this information to calculate your adjusted cost base for the stocks you’ll accumulate over the years.
Overall DRIPing has its pluses and minuses. In many cases and as a part of many Canadian investors’ portfolios, adding a DRIP element is a solid strategy.
DRIPs are great for the “set-it and forget it” percentage of your portfolio. This could include, for example, Canadian Big-bank holdings as many of us buy them and hold them for years, if not decades. In this scenario, setting up a DRIP is a great way to continue to add to your holdings using dollar cost averaging (at a discount to the market price) without paying any ongoing commissions. This is provided you do not need the income.
Make sure you are in it for the long-haul.
DRIP investing must also align with your time horizon. DRIP investing works best for investors in it for the long-haul; years not months, otherwise, why start all the work in the first place?
In terms of the type of stocks we recommend DRIPing, at minimum;
• Consistent and growing annual cashflow. ?
• Consistent dividend track record. ?
• Dividend growth. ?
• Solid dividend yield. ?
• Reasonable dividend payout ratio. ?
• Solid management team with share ownership. ?
• Industry with a stable or growing long-term path. ?
…and much more.
To help you get started on your path towards creating a 10-12 stock DRIP Portfolio of your own we have included a number of tools.
- A list of over 125 Canadian stocks offering DRIPS with a number of key stats. ?
- 3 recent BUY reports from KeyStone’s Canadian Income/Dividend Stock Research which continue to offer good value long term and offer cost effective DRIPs with SPPs.?
- We have also highlighted another 8 stocks which we do not currently have coverage on, but consider relatively high quality and have potential interest as DRIP stocks.
You can purchase this report online for $599 – or become a Canadian Income Stocks client and immediately gain access to this great report with its unique recommendations for free.