Jon is a frequent commenter on this blog and I recently noticed that he has spent a lot of effort to put together an excellent primer on DRIPs for Canadians. Jon’s DRIP resources include a flow chart to get started with DRIPs, a FAQ and a list of Canadian companies offering DRIPs and SPPs and much more. Jon agreed to share his experience with DRIPs with our readers:

As a DRIPper, my goal is to build a large portfolio of companies, which have a history of paying and increasing their dividends. I do this through a company’s Dividend Reinvestment Plan (DRIP) and Share Purchase Plan (SPP), which is most cases, is completely free.

I started three years ago and now hold 7 DRIPs and I’m looking to add more. At first it was confusing trying to understand DRIPs, especially since I didn’t know where to go for help. I started my first couple DRIPs by buying shares in the open market through my discount broker and paying for a certificate, which was costly. Then, I discovered the DRIP Resource Center forums where investors can exchange single “seed” shares. Most plans require you have one share to be eligible, so I traded single shares as a way of expanding my DRIP holdings.

DRIPping does not suit everyone’s financial goals, but I think it’s a worthy investing method. Simplicity is the key: dividends buy me more shares for free and I can buy more by mailing in a cheque. Fractional shares are purchased and compounding works for you. Since I don’t plan on selling, I won’t face capital gains, and with the favourable tax treatment, I pay minimal taxes on my annual dividends.

I currently own CIBC (TSX: CM), Enbridge (TSX: ENB), H&R REIT (TSX:HR.UN), Telus (TSX: T), TransAlta (TSX: TA), Fortis (TSX: FTS), Scotiabank (TSX: BNS) and Johnson & Johnson (JNJ, in trust for my daughter) in my DRIP portfolio. My total returns were skewed in 2006 and 2007 due to the massive gain and subsequent drop in CIBC shares. More important to me is that the average dividend growth for my holdings was 13.5% in 2007. I would prefer stock prices to stay low so I can buy more shares at a discount. I should add I maintain a modest RSP portfolio and I have a pension plan at work, which complements my DRIP goals.

Many years from now, I look forward to “turning off” the DRIP before I’m retired and receiving dividends in cash. Wouldn’t you like to get paid for life?

This article has 30 comments

  1. I like your comment about wanting share prices to stay low so that you can buy more shares at a discount. I feel the same way. If you stay focuses on dividends, and dividend growth in a way it trains your mind to buy dividends instead of stocks.

    Nobody knows where stock prices are going and when they will go there. It is comforting to just resign to buying yield…

  2. Canadian Capitalist

    People like us who are in the asset gathering stage should wish for bear markets and low prices to load up assets. But somehow people like stocks when they are going up, not the other direction.

    Speaking of which, a decent buying opportunity seems to be shaping up in REITs.

  3. It’s hard to get over it mentally but it really is true. It is difficult to stop routing for your stocks……they’ll take care of themselves…

  4. So did you enrol in each DRIP through the company directly? Do you find it difficult to keep track of share prices when purched? Or since you never plan to sell, its less important?

    What about keeping all of these in a Canadian ShareOwner type broker account? The fees aren’t bad, but its not free. Do you use CSA or any brokerage to keep all of the drips?

  5. Let’s all hope we get there Jon!

    OB routing for you

  6. djstef: Yes, you setup and enroll each DRIP separately.
    See my website for a simple Excel spreadsheet to keep track of purchases, which is where I enter my quarterly statements. You don’t really need to do that since the Agent lets you know how many shares you own. ACB can be calculated any anytime, but yes having a spreadsheet helps. ACB is obviously only needed for Capital Gains (when selling).
    I’ve never used CSA as I really didn’t understand the benefits for the cost. I have no synthetically dripped stocks.

  7. As Warren Buffet says, the only time you should hope that stocks go up is when you are selling. If you are buying, you should hope they go down and stay down.

    Good post – the flowchart really simplifies it!

  8. I am so proud of my new DRIP community. U guys and gals are simply the best.

    k

  9. >>”Speaking of which, a decent buying opportunity seems to be shaping up in REITs.”

    I’m keeping a close eye on Riocan, Calloway, and Brookfield Properties. Calloway is in the 7% territory based on today’s close. Their distribution should at least keep up with inflation, so 7% real return is “almost” money in the bank.

    I wonder if a distribution hike is imminent for Riocan this year.

  10. Canadian Capitalist

    FJ: RioCan raised its distribution from $1.32 to $1.35 in Nov. We may have to wait awhile for another increase.

  11. For me, I don’t DRIP inside of my RSP because my intial stock purchase is usually at the maximum of my desired allocation for that stock and would prefer to use the distributions to help me diversify my holdings.
    I also don’t DRIP outside of my RSP because I mainly hold leveraged positions and I need for those investments to be able to carry themselves (meaning that the distributions should cover the interest that I pay for the loan I took out to buy the shares).

  12. I tend to let the dividends accrue in cash (we’ll sweep them to a high interest account so they are still working), but then once a quarter we look for the holding that is down the most (there’s always one, it seems) and we will put it all into that one stock that is down – to get the higher yield. I find that this allows us to be selective with the dividend re-investing to really get a good bang for the buck. (This isn’t feasible for non-fee based accounts as the commissions might eat too much into the strategy.)

    Just another method of doing the same thing. But when there are enough holdings, there’s always one that’s down enough so even when factoring the discount some DRIP plans offer, it allows you to get the same effect (and many times it can be better).

    6 of one, 1/2 dozen of the other I suppose…

    Great post and great site Jon!

  13. It seems US brokerages make it much easier to drip. In my 401k, I have the option to reinvest the dividend for each holding. No fee is paid for the investment and fractional shares are purchased. Sounds like a DRIP to me…?

  14. Telly: Yes, that is a DRIP, and you are fortunate to receive fractional shares. I’m assuming you still pay for purchases though. For Canadian brokerages it would be for whole shares only, so smaller holdings would not qualify.

  15. CC – Sorry, I didn’t realize Riocan already raised their dividends in Nov. $1.32->$1.35 is only 2.27% and that’s after ~2.5 years of doldrums. What I’m struggling with Reits is will my distributions keep up with inflation. I really want to diversify my portfolio into real estate. Perhaps I should view Reits as the middle ground between equities and bonds?

  16. Jon,
    I pay a fee for the original transaction but not for the reinvestment. From what I understand, this seems to be fairly common for US brokerages, both registered and non.

    Unfortunately, it doesn’t work the same for my Canadian accounts…

  17. Can DRIPs be set up for US companies through discount brokerage?

  18. Venter: It depends on the company and the broker. Speak with your broker. US DRIPs also exist on their own.

  19. Speaking of which, a decent buying opportunity seems to be shaping up in REITs.

    Tell me about it. My once-awesome AX.UN units are now worth about the same as when I bought them more 2 years ago. Ironically, if it weren’t for the DRIP, I’d be in the red, but thankfully, I’ve reinvested the distributions into new units.

    But yeah, I can’t for the life of me figure out the hate-on people have for REITs. Aren’t they supposed to do well during times of incertainty? What gives? I’ll keep holding, but it’s very strange…

  20. Canadian Capitalist

    I made today’s post on REITs which I think are offering a buying opportunity after many years.

    FJ: Some people like David Swensen argue that real estate is between stocks and bonds in the risk-reward spectrum. Others say that RE offers equity-like returns. Either way, even a 7% return that at least partially keeps pace with inflation when long bonds are yielding 4% isn’t such a bad deal, IMHO.

    GIV: I’m not very familiar with AX.UN but the entire sector is down sharply. I’m about 50% in and if it falls even more from here, I’ll add to my positions.

  21. Canadian Capitalist

    FJ: I double checked RioCan’s distribution history and they are regularly increasing their distributions. Not at a great pace, mind you, but at a 2% to 3% clip, enough to keep pace with inflation. With REITs that’s pretty much what you can expect.

    https://riocan.com/_bin/distributions/dates.cfm

  22. Jon D: with TDW, companies all have DRIP programs (GE, JNJ, INTC, LLY, PG)

  23. Hi! Thanks for the info. This is a great article.

    With all the bad CIBC news we are hearing, is this a good time to buy? Or bump it? And if you already own some shares. Will you be buying anymore?

  24. CC: I used GlobeInvestorGold to lookup Riocan’s historical monthly distributions but GIGold carried only 2 significant digits. It’s possible that some of the increases were hidden behind the rounding, so I apologize if I misled anyone.

  25. Pingback: Book Review: The Lazy Investor

  26. Here is another excellent list of Canadian dividend reinvestment plans: http://cdndrips.blogspot.com/

  27. Pingback: My Own Advisor » Revisiting why I DRIP » My Own Advisor

  28. As a Canadian Investor….Is it possible to invest in a company that offers a DRIP through my TFSA?

    • Ram Balakrishnan

      @Robert: Definitely. Call and ask your discount broker to enroll you in the DRiP.

  29. Hi Jon. Great job with the site and the article! When you want to get dividend payments in cash, do you simply just turn off the DRiP? If so how is this done?