What is a DRIP?

DRIPWhat is the meaning of DRIP for investors? What is a DRIP in investing?

DRIP is the short acronym for Dividend ReInvestment Plan. Reinvesting dividends is a simple, yet powerful, concept that employees with stock purchase plans (ESPP) or DIY investors can leverage to build a dividend growth portfolio. There are two types of DRIP investors can leverage:

  • Full DRIP – This approach implies that all pennies you received from the company’s dividend is re-invested and fractional shares are tracked. With individual stocks, this is only possible through a transfer agent.
  • Synthetic DRIP – This approach is provided by discount brokers and only full shares can be purchased and added to your account.

With both types of plan, DRIP simply means that you can put your money at work and watch it grow.

DRIP Plans

These plans are offered by the corporation and approved by the board of directors of public corporation and offered to shareholders. Most plans are similar in that they allow shareholders to purchase shares (including fractional) with the dividend cash received by the company.

In most cases, these plans are managed by transfer agent companies such as Computershare, CST Trust Company or Valiant Trust. The transfer agents will manage the account on behalf of the company you are investing in.

Both plans below will allow investors to not only put compound growth at work but to also apply a dollar-cost averaging approach.

Full DRIP with Transfer Agents

  • Cash dividends can be reinvested to purchase shares (including fractional)
  • Some corporation will provide a discount on the shares purchased
  • Some plans will allow you to make optional cash purchase (OCP) at little to no commission
  • When available, the optional cash purchase can have a minimum and a maximum

Fractional and discounted shares can really pay off over time. It accelerates the compound growth of DRIP investing.

By default, the dividends is fully re-invested but you have the options, in some cases, to have it paid out in cash.

Synthetic DRIP with Discount Brokers

  • Dividend is paid and deposited in your account
  • Discount broker acquires shares if enough money is present and deducts the cost of the share
  • Discount from corporation can be applied but it depends on the discount broker

Starting a synthetic DRIP is as simple as asking your discount broker to start re-investing your dividends. In some cases, it’s an all or nothing. With an all or nothing discount broker, it means that all dividends from every holdings in the account will be re-invested if it meets the full share requirements.

DRIP Example

Let’s take Fortis TSE:FTS for example, it’s a Canadian Dividend Aristocrat and it has increased its dividends for many years. Imagine that you were invested in Fortis 20 years ago and you had your dividend reinvested. You would have the following benefits:

  • Full and/or fractional shares purchase every quarter
  • A discount of 2% on the shares purchased

Below is a table showing you the difference between fractional shares and full shares. After 20 years, you end up with 8 more shares simply by leveraging fractional shares. If you do OCP, it also buys fractional shares for you. Over time, it can add up. The table below simply assumes you buy once and let compound growth do its work.

Year Price Value Shares Fractional Shares Full Shares Dividends Dividend / Year
1990 $5.41 $5,000.00 924.000 0.000 0 $0.00 0.363
1991 $5.97 $5,858.16 981.266 57.266 57 $341.88 0.370
1992 $6.13 $6,380.68 1,040.895 59.628 59 $365.52 0.373
1993 $7.16 $7,853.55 1,096.865 55.970 55 $400.74 0.385
1994 $5.44 $6,411.17 1,178.525 81.660 81 $444.23 0.405
1995 $6.81 $8,523.68 1,251.641 73.117 73 $497.93 0.423
1996 $8.50 $11,177.16 1,314.960 63.318 63 $538.21 0.430
1997 $10.50 $14,385.66 1,370.063 55.103 55 $578.58 0.440
1998 $9.56 $13,714.33 1,434.553 64.490 64 $616.53 0.450
1999 $7.85 $11,910.38 1,517.246 82.692 82 $649.14 0.453
2000 $9.00 $14,353.14 1,594.794 77.548 77 $697.93 0.460
2001 $11.74 $19,468.45 1,658.300 63.506 63 $745.57 0.468
2002 $13.13 $22,577.76 1,719.555 61.255 61 $804.28 0.485
2003 $14.73 $26,223.22 1,780.259 60.704 60 $894.17 0.520
2004 $17.38 $31,902.24 1,835.572 55.313 55 $961.34 0.540
2005 $24.27 $45,627.73 1,880.005 44.433 44 $1,078.40 0.588
2006 $29.77 $57,227.37 1,922.317 42.311 42 $1,259.60 0.670
2007 $28.99 $57,304.26 1,976.691 54.374 54 $1,576.30 0.820
2008 $24.59 $50,583.51 2,057.076 80.386 80 $1,976.69 1.000
2009 $28.68 $61,136.31 2,131.671 74.594 74 $2,139.36 1.040
2010 $33.98 $74,821.64 2,201.932 70.261 70 $2,387.47 1.120
1,277.932 1,269.000

As you can see, when you are starting, the fractional shares can really help accelerate your portfolio. If you were really young and slowly adding a couple of hundred dollars a year, the fractional shares can matter. I believe that using DRIP through a transfer agent is the best way to educate young adult about investing and getting them started. There is no way they can be tempted to quickly sell or buy or to be obsessed with technical analysis.

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