Guide To DRIPing

DRIPA recent article by ‘The Weathly Canadian’ along with the comments had me reflect on the reasons I DRIP (Dividend Reinvestment Plan) and the conditions under which I DRIP. No investor scenarios are equal so it’s important to understand the benefits and what it means to your portfolio when you DRIP.

Before looking at different DRIP strategies and the benefits, let’s review the 2 different DRIP options.

Ways to DRIP

Full DRIP

For lack of better term, Full DRIP refers to the Dividend Reinvestment Plan offered by the companies and managed by transfer agents such as Computershare and CST Trust Company. Those plans allow you to participate in their Optional Cash Purchase (when offered) and to enrolled in the DRIP plan at no fees. Dripprimer.ca has a full list of all Canadian companies that offer Full DRIP.

Pros:

  • Optional Cash Purchase (OCP) at no fees
  • Available Discount on Dividend ReInvestment Plan (DRIP)
  • Fractional Shares for both DRIP and OCP

Cons:

  • OCP purchases at pre-determined times – You can’t time your purchases

You have the option of receiving your dividends by cheque or by direct deposit when you are ready to receive your dividends to use it as you wish.

Synthetic DRIP

This DRIP process leverages the current trading platforms that any DIY investor uses. It’s a service provided by the brokerage firm rather than the companies.

Pros:

  • Available Discount on Dividend ReInvestment Plan (DRIP)

Cons:

  • No Fractional Shares

Dividend Reinvesting Strategies

All Dividends in Cash – I want to pull the trigger

This method allow you to select your purchase price but at the cost of compound growth depending on your amount of dividends. If you were to receive $10K per month in dividends for example, it’s plenty to make future purchases regularly and make your money work for you. If you get $100 per month, it’s not enough to buy new shares without a costly transaction with your broker. It may take months before you can actually make a purchase and you forfeit compound growth.

Diversification – I want to control my holdings growth

Based on your dividend income, you can decide to let your holdings grow with the dividends or opt to diversify with the sum of your dividends. Depending on your portfolio allocation, you DRIP accounts may start to run away compared with your other holdings and it may be a reason to not DRIP for some investments.

Compound Growth – I want to accelerate my income growth

Since most companies pay dividends quarterly (and some monthly), buying shares every quarter allows you to earn more dividends quickly. With fractional shares, you get to accelerate your growth. This is what I like about the Transfer Agents since all your pennies are at work.

Dividend Income Driven

This is the strategy I’ll be using. It’s basically a mix of Compound Growth and Dividends in Cash. Early on when the investments are earning little in an account, I let them DRIP for compound growth. At some point, once I reach a monthly dividend income threshold, I can wait to invest the dividends. My goal is to always ensure I have compound growth working for me so that my newly earned dividend income can go to work right away. As such, I either earn enough in one account to re-purchase shares of any company I want (or even increase holdings I currently have) or I DRIP them until I reach the desired dividend income. I’d say that $2,500 seem like a good starting number where buying shares isn’t too expensive and you can start a decent position – I would like to target $5,000 per quarter to be confortable.

I currently DRIP 11 companies with the Transfer Agents to accelerate my DRIP growth with companies that have a history of paying dividends and growing them. This allows me to not worry about the lack of control on the purchase price and focus on the Dollar Cost Averaging and Compound Growth. I start small and I slowly add to my holdings.

Readers: What’s your strategy? Any other strategies to share?

Image: worradmu / FreeDigitalPhotos.net

22 Responses to "Guide To DRIPing"

  1. I prefer to let my dividends accumulate within my cash holdings so that I can control the next purchase. Once I have $3k or more then I usually look to purchase a new position in an existing stock or add a new one.

    Reply
    1. The Passive Income Earner · Edit

      Thanks for the comment Echo!
      Interestingly enough, I don’t always have enough to buy shares in my RRSP and TFSA account so I end up having to do that as well. However, I tend to add funds faster than the DRIP accumulate and at the time of purchase I use it.

      Reply
  2. Nice post! I’m going to write one as well, revisit my DRIPping strategy and reference this article and the one by TWC.

    I like these articles because they make me think.

    Unlike Echo, I don’t let my dividends accumulate. Almost everything I own is either running a full DRIP or synthetic DRIP. I feel DRIPping is excellent because I can DCA and, like you, I want to take advantage of compound growth.

    My goal, like you I believe, is to always have compound growth working so I don’t have to someday 😉

    I do see where Echo is coming from, making strategic buys though.

    Reply
    1. The Passive Income Earner · Edit

      Thanks for the compliment. I have let enough time get by, I want time to do its magic on with my dividend and provide me with compound growth.

      I have been trying to buy enough shares to buy at least one share with my dividends. I am also trying to get aristocrats with a 10% dividend growth. Time only will tell if that pays off 🙂

      Reply
  3. Great article here. Really in-depth.

    I wrote about this not too long ago, and my stance is the same as Echo’s. I let the dividends accumulate over the course of a month and then add fresh capital. I usually make just one purchase with the combined capital. I still get the compound growth, but control which companies receive my reinvested capital.

    Great stuff and I definitely see your line of reasoning as well. I can see how the fractional shares can definitely add up over time!

    Reply
    1. The Passive Income Earner · Edit

      Thanks for stopping by. I’ll check out your post. I agree with you that you benefit from compound growth as well if you can keep up adding extra cash to invest. Keep it up. There is more than one way to skin a cat as the saying goes.

      Reply
  4. First off, thanks for the mention! Had I known about some of your DRIP posts before my “Consideration of DRIPs Series”, I would have surely included some of your material on my blog.

    A great post! The details are explained crystal clear for your readers and interesting to read.

    I tend to take a mixed approach. I have prioritized my registered accounts to run synthetic DRIPs, while my non-registered accounts accumulate dividend income for general living expenses and investing elsewhere.

    My goal is to incorporate DRIPs into my holding company’s positions in 2012, but I’ll see how things develop before doing so.

    Superb job!
    TWC

    Reply
    1. The Passive Income Earner · Edit

      Thanks for the comment and don’t worry about the mention. I am glad to have the interaction. I am really curious about your holding company. It’s something I have discussed with my parents since they have one due to the company they had and I am curious of the benefits as an investor if any.

      Reply
  5. Hey PIE, this is one of your best posts man! very well done 😉

    I personally prefer to buy all my stocks through a discount brokerage, so I can buy or sell when I want to, or more importantly to top-up when my favourite companies go on sale from time to time.

    I feel the $9.99 trade fee with TD is pretty cheap for the flexibility it gives me. I know in the long run using DRIPS and SPP (systematic purchase plans) through companies is cheaper, but it just seems a bigger headache to me to do it that way – too much work for a Ninja.

    Regarding DRIPS, I “synthetic” DRIP everything I can, the only reason not to DRIP is becuase I don’t have enough shares in a company to do so.

    Cheers
    The Dividend Ninja

    Reply
    1. The Passive Income Earner · Edit

      Thanks Ninja! Looks like everyone is using a good mix of strategies. I hear you about not having enough shares. I am in the same boat too for some investments.

      Reply
    1. The Passive Income Earner · Edit

      From what I have found with regards to the accounts for Transfer Agents, they do not offer TFSA, RRSP or RESP. It’s regular taxable account.

      You can however DRIP in any accounts as I do DRIP within my TFSA, RRSP and RESP accounts. You can even get the discount on re-invested shares. The OCP is just a regular transaction though with a transaction fee.

      Thanks for stopping by!

      Reply
  6. Great post! I know I’m late in commenting, but I just learnt about DRIPping and you have done a great job of elaborating just how it can be done. Loved your post on how one can start dividend investing with a small amount of money.

    I have just started documenting my plans and will be using a lot of your tips and resources you provide on your site.

    Reply
  7. Hello there, I would just like to say that I have very much enjoyed reading this information. It makes a change to discover something that is as well though out and educational as this. I will no doubt be returning right here to read any updates. Many thanks once again for this gratifying read.

    Reply

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