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

Post Comment