DRiP Explained – Multiple ways to DRIP

DRIPDividend Re-Investing Plan (a.k.a. DRIP) is a concept and there are many ways to go about it. I am not sure if the different ways were ever given a name but I’ll focus on two and explain them. I call them ‘synthetic DRiP’ and ‘full DRiP’.

DRIP Explained

There are 2 ways to drip and the differences over a long period of time can actually be significant.

Full DRiP

Doing a full DRiP is when you register your share with a transfer agent such as Computershare and CST Trust Company. It’s not as simple as buying shares through a stockbroker or a discount broker and it requires a share certificate. I won’t go into all the details about the steps since there is already a lot of information at the ‘The DRiP Investing Resource Center‘. The link is accessible from my resource page too.
  • A ‘Full Dividend Re-Investing Plan’ allows you to buy fractional shares. (That’s correct, it’s not a typo.) For example, you can see in the table below that the shares purchased have fractions.
  • There are no transaction fees allowing you to make a smaller contribution without increasing your purchase price due to transaction fees.
  • Some companies give a discount when investing more through ‘Optional Cash Payment’ (OCP).

 

Regular Investment

Share Price

Shares Purchased

$100

$11.00

9.09

$100

$12.50

8.00

$100

$10.75

9.30

$100

$15.60

6.41

$100

$18.35

5.45

Totals

$500

$13.07

38.25

Synthetic DRiP

It’s called synthetic because it tries to emulate the ‘Full Dividend Re-Investment Plan‘. For some companies, that’s the only way to DRiP. Here are some points to consider when doing synthetic DRiP.
  • Discount brokers provide different features when it comes to DRiPing in your account. I know some discount brokers don’t support DRiP whereas some support DRiP along with the reinvestment discounts. Scotia iTrade is discount brokers that provide the discount.
  • Fractional shares are not supported by discount brokers. You may need to buy enough shares to DRiP 1 single share. Otherwise, you’ll simply get some cash. The shares reinvested do not have any transaction fees either.

Which DRIP should you do?

You’ll need to ask yourself:
  • Does my discount broker support DRiP?
  • Does my discount broker reinvest with the discount?
  • How much will I invest? Is it enough to DRiP one share?
  • Do I start small and grow slowly with fractional shares?
Full DRiP allows you to start small and grow slowly at your own pace whereas synthetic DRiPing requires that you invest enough to DRiP at least one share. Remember that compound growth is achieved by getting more shares to work for you.

Image: Master isolated images / FreeDigitalPhotos.net

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