The following thoughtful question is from Kevin:
To DRIP or not to DRIP: that is the question I’ve been pondering for some time and I thought I’d ask your opinion. Basically, what are your views on DRIPs?
I see it in two ways:
1) I’ve purchased a great dividend (or income) producing stock/trust. With a DRIP I can continue to increase my holdings of that great company with no additional commissions or brokerage fees. Net effect: larger holding of a good company with a dollar-cost averaged purchase price and decreased average commissions/fees.
2) I’ve purchased a great dividend (or income) producing stock/trust at a discount. After some time the share price goes up and the stock sells at a premium. Without a DRIP I’ll get the dividends in cash and perhaps be able to purchase shares in a different company that is selling at a discount. Net effect: a diversified and value-cost averaged portfolio.
Thank you for a great question. The first option might be a reasonable choice for a fairly static portfolio (no additions and no withdrawals), which hardly ever happens in practise. Even here, an investor should be careful that the regular dividend reinvestments do not result in a portfolio that is tilted mostly toward the high-yielding dividend stocks.
I personally prefer to let our interest payments and dividends collect, add our regular savings to it and invest the proceeds periodically. Since I am going to pay the commissions when investing our savings anyway, this method works well for me. I look forward to comments from our readers on this topic.
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21 responses so far ↓
1 FinancialJungle.com // Jun 6, 2007 at 9:10 pm
Potentially you’ll have a hostile audience on this topic as there are a lot of die hard DRIP investors out there. I don’t use DRIP myself for the reasons you specified, and additionally the high administrative overhead to track the adjusted cost base over many positions.
DRIP proponents often mention the quality of companies that offer DRIP, but that’s a separate topic. Investors can still own shares of these companies without participating in their DRIP programs.
I’d only consider DRIP for companies that offer discounts to market value.
–> Taken from globe and mail
ARC Energy Trust (AET.UN). Widely considered to be one of the more stable oil and gas energy trusts, ARC offers a 5-per-cent discount on reinvested dividends and cash payments used to buy more units.
H&R REIT (HR.UN). Canada’s second-largest real estate investment trust offers a 3-per-cent discount on its DRIP, but not its SPP.
MDS Inc. (MDS). This health care company offers a 5-per-cent discount on its DRIP, but not on its SPP.
Nexen Inc. (NXY). One of the largest oil and gas producers listed on the Toronto Stock Exchange, Nexen offers a 5-per-cent discount on its DRIP.
RioCan REIT (REI.UN). RioCan is the largest REIT in the land and it offers a discount of 3.1 per cent on its DRIP, but not its SPP.
2 FourPillars // Jun 6, 2007 at 9:52 pm
I think DRIPs are considered ‘easier’ to manage in that you don’t have to do anything with the dividend income assuming you don’t want to spend it.
For an active investor who is contributing more $$ to their portfolio on a regular basis, the DRIP is somewhat useless in my opinion. However for someone who only owns one stock and isn’t an active investor - maybe they received the stock as a gift? then the DRIP might be perfect.
3 Canadian Capitalist // Jun 7, 2007 at 7:02 am
I thought Kevin is asking about the synthetic DRIPs offered by almost all discount brokers, which would allow you to reinvest the dividends into whole shares.
4 Middle Class Millionaire // Jun 7, 2007 at 8:12 am
I agree with you CC. I also don’t enrol in DRIPs. However, all my dividends are reinvested just not necessarily in the company that issued them:)
MCM
5 Big Cajun Man // Jun 7, 2007 at 8:15 am
I am a drip fan, because I am so gosh darn lazy. The companies I buy for dividends I want more stock from, so if the dividends buy them for me (at a slower pace), then I am happy, and not having to pay for the fees on the buy is the icing on the cake.
I will reap my benefits when I sell the stock later. –C8j
6 0xCC // Jun 7, 2007 at 9:10 am
I have a few stocks that I use the brokerage DRIP for (so I only get whole share) but I do it on selected stocks. The kinds of stocks that I do it for are the ones that I intend to hold on to forever. Stocks like the banks and insurance companies I intend to hold onto forever. I would also enroll in a DRIP for a REIT if I had one but they haven’t been attractive enough for me to buy them yet… Stocks that I don’t want to enroll in a DRIP for are stocks like energy companies (energy prices and to a lesser extent energy stock prices are too volatile and the stocks are also fairly high-yielding and I have too much of my portfolio in energy stocks already).
7 KS // Jun 7, 2007 at 9:34 am
I avoid DRIPs only because I don’t want the dividends to be used to purchase more stock when the stock is overvalued. When a stock is overvalued I may wish to hold on to it, or sell it but never to buy more of it.
I like being able to collect the dividends and reinvest them myself into undervalued stocks.
8 ThickenMyWallet // Jun 7, 2007 at 10:09 am
I enroll in DRIP’s in my RSP because I own large cap stocks that (knock on wood) I will hold for the life of my RSP and I rebalance the cash/fixed income portion to prevent over-weighing.
In non-registered plans, it really depends on the stock. B/c I am self-employed and do not have predictable income, dividend income always adds to cash flow on a tax-friendly basis. For the larger blue chip stocks, I enroll in a DRIP to add to quality holdings but other smaller stocks I do not.
I also own Manulife which charges a (unfair) fee to enroll in the DRIP so another factor to consider is the enrollment fee.
9 Mr. Cheap // Jun 7, 2007 at 10:15 am
Like a lot of the other responses, I’m anti-DRIP. If I get a $5 dividend, what’s to say that the company that paid it is the best buy right now? I’d like to purchase what’s on sale TODAY, not more of what I thought was a good buy in the past.
10 Lise // Jun 7, 2007 at 10:54 am
Good thinking here. I’m a DRIP user myself, but I did it without really thinking about it. So reading your posts made me stop and think — which is always a good thing with investments.
I’m going to stay with DRIPs. I started switching to blue chip dividend paying stocks a few years ago, with the idea of building enough dividend income to support me when I retire in 5 years. So, growing these dividend-paying stocks any way I can just seems to make sense for me.
11 Jon D. // Jun 7, 2007 at 11:05 am
DRIPs are perfect for people who have an investment goal to match it. Many Hard-Core DRIPpers (such as myself) are looking at income replacement in the not-near future. Since A.) cdn div. payments are tax advantageous (actual tax gain for those under a certain income) and b.) most corps that have DRIPs have been paying steadily increasing div’s for over 50 years, & some banks over 100 years.
All my non-reg’d holdings are DRIPs for the above reasons. Also, I cringe at fees and commissions. There has has been quite a number of debates regarding share valuation vs. dollar cost avg. but most DRIPpers feel the benefits outweigh any overpayment. Yes I’ve perhaps lost out on large capital gains had I invested in certain corps, but that’s not my goal. I want to sleep at night, and share price is not big concern for me, increasing dividends are my focus. Say you pay $50/shr for corp paying $1/yr. (2%) Now say in 5 years that corp is paying $4/yr since it’s share price has risen. Well, on your original shares, you’re getting an 8% yield. Not bad after a couple of years. Imagine after 15, 20 or 25 years?
One thing to note on DRIPs is the difference between DRIP, SPP (share purchase plan) and corps that offer both or only DRIP.
I’ll praise DRIPs til the cows come home since it meets my objectives but I won’t. Anyone looking for more hard-core drippers head over to the DRIC http://www.dripinvesting.org/Default.htm and check out the message boards, esp. the Canadian one which is quite active.
12 Mr. Cheap // Jun 7, 2007 at 11:20 am
Jon D. and Lise: Any chance of either (both?) of you posting some of the companies you bought and what the return has been like? Sounds like you two have some real-life personal experiences going back quite a while with DRIPs.
13 Canadian Capitalist // Jun 7, 2007 at 11:45 am
Jon, Lise: For the record, I think DRIPs are a very good strategy. I am not convinced that most investors can spot value very well, so you might as well periodically purchase shares. It’s even better that you are avoiding fees and commissions along the way.
14 FinancialJungle // Jun 7, 2007 at 11:56 am
CC - If an investor can spot value very well, why was he stock picking the first place?
15 Rookie // Jun 7, 2007 at 12:10 pm
Do you have to pay tax on dividends that are re-invested via DRIP as you would on dividends that you keep for other purposes?
16 Jon D. // Jun 7, 2007 at 12:15 pm
Cheap: I am relatively young compared to most drippers. I am over 25 years away from pensioned retirement. Also, I signed up my 1st drip in Nov 2005, so I don’t have a long history of returns.
BUT I can say 2006 was a good year, I believe I beat the TSX comp but not 100% what the Comp. return was. Obviously I included reinvested dividends whereas the comp. does not.
Also my current yield on my cost base is 4.45% and I am only holding 1 REIT (H&R).
Side note, the rumour is Computershare, the Trustee/transfer agent for many Cdn. corps is going to try and setup a similar system that they do in the States which would be a vast improvement over the current statement and cheque method.
17 GIV // Jun 7, 2007 at 12:35 pm
Interesting question as usual CC.
My views on DRIPping are generally positive, as yours seem to be. The good things about them are that it’s a sort of forced-savings program (portfolio increases in time with no effort on my part) and I save on brokerage fees (always important, especially with smaller portfolios). When you get a discount on the share price (as I do with my REIT, AX.UN) so much the better. Even if the stock flatlines I’m making 10% a year when you combine the payout and the purchase discount.
The bad? At any given time, you may be investing in a fully valued or even overvalued security. When that happens you’d technically be better off buying a different stock at a bargain price and holding off on your dividend-payer for a while. You may also be getting overweight in one company or sector if you’re quietly accumulating one company’s well-performing shares.
But in my experience, that’s a wash over the long term. Like you said, most investors aren’t great valuators. I’d rather look back in 30 years and accept that I occasionally paid full price for my BMO shares, than look back at a host of value traps I plowed by BMO dividends into because I was “sure they are going to come back.”
18 Jon D. // Jun 7, 2007 at 12:43 pm
rookie: Yes. Regardless if the dividends are reinvested, or received as cash, they are taxable. But as I mentioned above, the “enhanced” div. tax credit is higher than some marginal tax rates so if you’re income is below a certain amount, you get a refund for receiving dividends. Taxtips as a good page on it: http://taxtips.ca/divtaxcredits.htm
The above is not applicable in a RRSP account, but since no “true” DRIP exists registered it doesn’t really matter anyway.
19 FinancialJungle // Jun 7, 2007 at 12:44 pm
So sorry guys. Found a typo in my post.
What I meant to say was if an investor CAN’T spot value very well, he wouldn’t have been a stock picker the first place, and we wouldn’t be discussing the merits of DRIP. If you’re considering DRIP, then you’re a stock picker, and you “should” know how to spot value and deploy your dividends accordingly.
20 Canadian Capitalist // Jun 7, 2007 at 12:48 pm
FJ: What can I say? Stock picking is still a popular activity
Rookie: You bet. Dividends are taxable in the year in which they are received.
21 rookie #2 // May 22, 2008 at 3:03 pm
how to start buying drip shares and spp on a ten year plan i want to start investing in this type of investment
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