The following query is from JU (slightly edited):

I presently have all my investments in mutual funds (locked-in and regular RRSP) and would like to switch to ETFs. I don’t believe there are any DSCs or fees payable if I sell these funds. My question is this: What is your strategy for ETFs as far as what to do with interest or dividends that are generated by the portfolio? For the time being, I won’t be putting any “fresh money” in to my RRSP but would like to re-invest the money that is generated by the ETF.

There are two ways of reinvesting dividends and income generated by a portfolio:

  1. Sign up for a synthetic dividend reinvestment plan offered by many discount brokers that allows you to reinvest dividends into full shares without incurring commission costs. For example, say you hold 1000 shares of XSB which made a distribution of $0.31465 shares in March 2008. If your broker offers a synthetic DRIP for XSB, you would receive 11 shares of XSB (at $28.45) and $1.70 in cash will be deposited into your account. You may find Canadian Financial DIY’s post on DRIPing ETFs to be useful.
  2. You can let the dividends accumulate and reinvest it once every year when rebalancing the portfolio.

I personally opt for (2) because I usually invest regularly and just combine distributions with savings. I suppose you can’t go wrong with either choice because how you do it matters little compared to the importance of reinvesting dividends. So, when it comes to reinvesting dividends, investors should adopt a simple motto: just do it.