Royal Bank (TSX: RY) became the second bank to introduce a discount on its Dividend Reinvestment Program. RY is offering a 3% discount for shareholders who elect to have their dividends reinvested in the common shares of the bank. The changes will be effective starting with the next dividend payment in May. You can read the news release here.

Earlier, Bank of Montreal announced that it is offering a 2% discount for shareholders opting to reinvest their dividends. The details of the program are available in the news release.

It is easy for registered shareholders to enroll in either bank’s DRIP program and obtain the discount but what about investors who hold the shares in a brokerage account? Interestingly, both news releases have the following statement:

Eligible beneficial or non-registered holders must contact their financial institution or broker for instructions on how to participate in advance of the above date.

I called RBC Direct Investing and asked if the discount will be available for investors participating in a synthetic DRIP available through the broker. The answer is that any discount offered on the stock is passed along to the participants in the synthetic DRIP subject to certain conditions (such as no fractional shares). Though I’m very interested in the Royal Bank DRIP discount, I decided against participating because the synthetic DRIP at RBC is an all-or-nothing proposition — you can’t sign up for DRIPs in just the stocks you are interested in adding to your position. Do you know if you can obtain the DRIP discount at your broker?

[Update: Bank of Nova Scotia also offers a discount on its DRIP program. Since October 2008, BNS is offering a 2% discount for reinvesting dividends in the company’s common shares. Thanks to James for pointing this out.]

This article has 20 comments

  1. Well, I don’t know if there’s any DRIP discount at TDW. I don’t even know if owning BMO stocks (DRIP’ed already) gets that 2% discount.

    But at TDW, you CAN select the stocks to enroll in DRIP individually by calling the rep. By default they are all cash dividends, then you can call to sign up say BMO/TD/RY shares, but pretty sure you cannot pick which dividend to DRIP and which to skip (e.g. Q1 and Q3 DRIP, Q2 and Q4 cash unless you enable & disable DRIP each quarter)

  2. I don’t know BMO or RY, the only bank I currently own is BNS and I am not aware of any discounts they are offering on DRIPS.

  3. BNS is also ofering a 2% discount on reinvested dividends.

    Be careful here though. A DRIP dividend discount means that the banks are issuing shares from treasury. Under usual circumstances the banks purchase the dividends required for the DRIP on the open market just like everyone else. Right now they are issuing shares for the DRIP instead of buying them. This means there are more shares outstanding and each share is slightly less valuable. For a long term investor(such as a DRIPer) this is actually a really bad situation despite the DRIP discount because the dilution of shares caused by the issuance of new shares compounds over time. An excellent example of this was seen just the other day when BNS released its latest earnings. They announced a 1% increase in profit to $842M from $835M but a decrease in EPS to $0.80 from $0.82 as a result of all the new shares issued from treasury as part of the DRIP program and share sales to raise capital.

  4. Well, this goes on to show you that canadian banks are also strapped for cash. They are trying to lure in investors to put all their shares in the company’s drip rather than use the cash to spend of other stocks..
    I wonder if dividend cuts are next for canadian banks..

  5. I think dividend cuts are VERY unlikely for the Canadian banks. They all have pretty big piles of cash on hand right now and they haven’t even posted any losses…yet. Remember the recent CIBC lesso. They posted a massive $3Billion rightdown for ENRON a few years ago and increased their dividend not long after. Then they posted some huge sub-prime right downs and kept plugging away at the dividend (including a small raise). Don’t expect any cuts, maybe a hold on raises but I expect they will continue to raise the div just at a much lower pace for the foreseeable future(like cost of living increases),

  6. Canadian Capitalist

    James: It is clear that Canadian banks are looking for capital and that is the reason for offering a discount on their DRIPs as a way of enticing small shareholders. However, I don’t think the rate of participation in the DRIP will affect how much existing shareholders are diluted. That is a decision made by management based on existing conditions. If they decide their capital structure is adequate, they’ll eliminate the DRIP, buy shares in the open market etc.

    DGI: With banks, it is always a question of confidence. If markets fret about a bank’s capital structure (rightly or not), management better take notice and shore it up. That is one reason, Canadian banks opted to issue common shares even at depressed prices — they had to.

    James: More importantly, I think Canadian banks are highly likely to survive intact. I think that’s a far more important question. So far, it looks like they will.

  7. James: thanks I was not aware BNS offered the discount on DRIPS.

    I agree the banks are very unlikely to cut dividends, last week we saw them with good results and almost all banks with capital ratio of over 10% . Should banks cut dividends I think we would have much bigger problems at that stage.

    However what about insurance companies?
    Manulife? Until about 2 weeks ago I believed they wouldnt, but the unfortunate situation they have is that they are subject to the equity market decline and with recent selloff I think chances are getting very good at them cutting.

  8. The majority of DRIPs/SPPs issue shares from treasury, which is why they offer discounts of a few points. Of course this is a dilution to all shareholders, just like any new share issue but a greater price to the Corp. Don’t quote me, but isn’t like the underwriting fee for new issues in the neighbourhood of 10% which makes 2-3% look like a deal for Corp’s. Why is why treasury run DRIPs/SPPs is an extremely cost effective way to raise capital, and even more so during a so-called “credit crunch.”
    Further, stock options for executives, board members, and employee plans are also from treasury (new issue) which is why so many Corp’s have annual share buyback for cancelling programs to counteract this dilution.

  9. Derek Foster’s 3rd book talked about enrolling in DRIPS. As I recall from the book, you just ask for a share certificate from your brokerage (they usually charge you for this service) and send that in along with a form and a cheque for at least the value of 1 share. The form is most likely at Compushare or CIBC Mellon.

  10. I really like the idea of DRIPs, and even better with a discount!

    However, I plan to start a Smith Manoeuvre this year so it won’t be as automatic, and no discount.

  11. I have the synthetic DRIPs turned on in my RBC DI accounts and have had the discount passed on, in some instances.

    The problem with RBC DI (in addition to the all-or-none DRIP’ing) is that they do not even tell you which equities are (1) eligible for the synthetic DRIP, and (2) whether you’ll actually get a discount if one is offered.

    I’ve had a few holdings where the company does offer a real DRIP program with discount, and its not passed on to RBC DI. They’ve got a magical list somewhere of all eligible holdings but you have to ask specifically on a case by case basis – sorta annoying.

    The way to go if you want to pick and choose is as was mentioned to get a stock certificate issued, then register with the company yourself. The only problem is it costs $50 a pop – so if you’ve got a number of holdings, it gets very expensive very quickly. Over the long run, I suppose you may come out on top if the discount is large enough.

  12. Canadian Capitalist

    James: Thanks for pointing out that BNS has a 2% discount on the DRIP. The information can be found here:

  13. I feel like I am watching Back to the Future! DRIP discounts use to be offered by dividend paying companies before we all decided every stock should be a ten bagger and companies acted like start-ups no matter how mature they were.

    Discount DRIPS, reining in of stock options, caps on executive compensation, EPS growth expectations in 5-10% year over year- looks like the market is coming back to the norm.

  14. JON202 – If the company offers a discount on their DRIP then yes they are issuing from treasury. No discount means they are buying on the open market.

    CC – In terms of shareholder dilution consider this: BNS pays out almost $500 Million per quarter in dividends. If even 10% of that goes into a DRIP then BNS will be issuing about 1.8Million new shares every quarter from treasury. Depending how long they intend to keep that up, it will hurt for long term shareholders.

  15. James: I would expect that the only new shares that are issued are the amount that result from the discount, not the entire DRIP amount. So using your numbers that would mean about 35,000 new shares, not 1.8 million. In any case it should be fairly easy to verify when next quarter’s results are announced.

  16. Was hoping to participate in the new BMO DRIP, but I hold the BMO shares in my new TFSA at TDWaterhouse. Talked to Computershare and don’t think it’s possible to participate in the DRIP – any creative ideas on how to out there in this blog’s wealth of information? THanks.

  17. leigh: You should talk to TDWaterhouse, not Computershare. TDWaterhouse does offer synthetic DRIPs and I think you would get the discount. The one pitfall of the synthetic DRIP is you don’t get partial shares so the amount of your drvidend must be enough to buy one share (and in that case you would only get one share). Of course with BMO right now that means you only have to own around 40 shares or so.

  18. Thanks for the link!

    I don’t think this program is large enough to really dilute the shares significantly.

  19. one thing that I plan on doing is using my DRIP portfolio to contribute to my TFSA. Everytime I get round lots I will request a certificate from computershare or the mellonheads and then deposit it with my broker. I just have to find a broker that will let me deposit into a TFSA free of charge. Then I will pay ZERO comissions and acheive discounts on shares purchased in some cases.

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