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