Getting started with DRIPs and SPPs, Part -1

A DRIP Money TreeThe following is a guest post from one of my favourite bloggers, Mark at My Own Advisor.

There’s do-it-yourself investing and then there’s really do-it-yourself investing. I’d definitely put full dividend reinvestment plans (DRIPs) that include share purchase plans (SPPs) in the latter category.  Not that full DRIPs are a difficult animal to understand but it does take some time and some know-how to get going.  Luckily for you, you’ve found this blog today and in the days to come 😉

I’ll give you some guidance to starting your DRIPping journey with company transfer agents, and some help for you to get that first stock share. Am I still speaking a foreign language to you?  Don’t worry folks, it will all become clear.

Getting started with DRIPs and SPPs is going to be a four-part series, providing you with an overview of full DRIPs with SPPs as they apply to Canadian dividend-paying stocks. You can read parts 1 and 3 here on the Dividend Ninja, and Parts 2 and 4 on my blog at My Own Advisor. Hank Coleman also wrote a recent guest post for the Ninja on DRIPs, where he outlined his Five Reasons I Love Investing With DRIPs.

Questions and answers

Let’s start with some questions I’ve received on my blog from time to time…

Question to My Own Advisor:
I’ve heard about dividend reinvestment plans (DRIPs) – what are they?

Answer:
A dividend reinvestment plan (DRIP) allows an investor to automatically reinvest his or her dividends, sometimes at a reduced price, without commission fees.   It’s a beautiful thing really.  When the stock shares you own pay enough dividends to buy one whole stock share, you can ask your discount broker to reinvest the dividends paid to buy more stock shares instead of getting the cash.  This process is usually a phone call away to your discount broker.  The money automatically gets reinvested to buy more shares when dividends are paid until you say ‘”stop”.

What I have described above is a synthetic DRIP associated with eligible dividend-paying corporations. Not that this dividend reinvestment process is “not real” rather there’s more to DRIPs than just those offered by discount brokers.  When people talk about DRIPs, especially the die-hard dividend investors, they’re really talking about full DRIPs (dividend reinvestment plans with share purchase plans or SPPs for short).   I’ll tell you why they love full DRIPs so much.

Question to My Own Advisor:
What makes full DRIPs different than synthetic DRIPs?

Answer:
The power of full dividend reinvestment plans (that includes share purchase plans) lies with the fact you can start this process with very little money – you don’t need to own tons of stock shares that pay enough dividends to reinvest whole shares.  In some cases, you can start with one stock share!

A full DRIP is an investment program offered to shareholders by certain corporate securities issuers or company transfer agents.  Canadian Stock Transfer Company (formerly CIBC Mellon) and Computershare are the two major transfer agents in Canada:

In many cases, full DRIPs with company transfer agents also permit investors to make additional cash contributions to their plans.  This is the share purchase plan I was talking about.  Investors can buy additional shares in the company and in most cases, at no commission.   You simply write a cheque and mail it in!  Your payment is used to buy more shares, even fractions of shares, at the cost of a stamp.

The company transfer agents do all the work; you just need to write the cheque.  The compounding power of full DRIPs comes with SPPs.  These share purchase plans allow you to buy more shares, in small amounts over time, at your own pace, with fractional shares reinvested.

With some full DRIPs, depending on the company and what it wants to offer investors in the plan (more on that later), you can also take advantage of stock purchase discounts; ranging from 0% to 5%.  You don’t have to apply for these discounts, they are applied automatically.  Think of it this way, your favourite stocks are always on sale.  Again, the company transfer agents do all the work.  Back to you cheque, it doesn’t need to be in the thousands of dollars.  It doesn’t even have to be in the hundreds of dollars.  In most cases, you can start with $25 or $50 depending upon what the full DRIP with SPP company plan says.  You can also send this cheque whenever you want, even skip a month or a quarter if you wanted to.   Pretty cool eh?

 Advantages of full DRIPs and SPPs

  • Full DRIPs can provide dollar-cost averaging.
  • Many great stocks offer full DRIPs with SPPs.
  • You need to keep track of your adjusted cost base but capital gains only occur when you sell a stock.
  • Full DRIPs can help take the emotions out of investing.
  • You can “turn off” your DRIP whenever you want.


Disadvantages of full DRIPs and SPPs

No investing strategy is perfect, and full DRIPs with SPPs are no exception.  Before we get too far down the road of getting that first share and DRIPping your stocks, here are some downsides to full DRIPs you should strongly consider if this approach is right for you:

  • You can’t control the price or timing of the dividend reinvestment purchase, the company transfer agent is in control of transactions.
  • In a full DRIP you are not using dividend income to be strategic; buying more shares when the stock price could be lower.
  • Setting up a full DRIP can be some work.  Just being honest here.
  • To set up a full DRIP, there are always costs in getting that first share, from someone or somewhere.
  • You need some accounting skills to keep track of your adjusted cost base; especially when you sell your stocks.
  • Some full DRIPs with SPPs have minimum purchase requirements; some are $100 or more.
  • There are some notification delays (i.e., about a week) from the transfer agents regarding dividend investment transactions; transactions are not real-time.
  • The transfer agent can sell shares for you, but you won’t have any say over the time and price you get, and you may have to pay a small fee.


Other articles on DRIPs

Here are some excellent posts from other bloggers who have recently considered or discussed DRIPs:


Question to My Own Advisor:

How can I get started with full DRIPs?

Answer:
Well, stay tuned to this blog, that’s another post for another day!

Readers, have you heard of dividend reinvestment plans (DRIPs)? What are your thoughts about reinvesting dividends?   Have you done it?

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Continue to Part-2: Getting started with DRIPs and SPPs, Part -2 »

Mark is a 30-something DIY investor who is passionate about indexing and dividend investing, using this two-pronged approach as he marches towards financial freedom.  Over the last year, Mark’s articles have caught the attention of both The Globe and Mail and The Toronto Star.  You can follow Mark on his wealth building journey via his blog at My Own Advisor and on Twitter.

14 Responses to “Getting started with DRIPs and SPPs, Part -1”

  1. The Dividend Ninja

    Nov 13. 2011

    Mark thank you for writing this guest post on DRIPs. I’m really looking forward to the rest of the series 🙂 Readers, Mark not only explains how DRIPs and SPPs work, but in Parts 3 and 4 shows you how to actually buy your first share (with computershare) and register your share certificate with the transfer agents!

    Computershare has a really easy to use site, and you can view all the DRIP and SPP plans easily online.

    Thanx again Mark 😉

  2. MoneyCone

    Nov 14. 2011

    Very nice beginners guide on DRIPs! I enjoyed the post.

  3. DSO

    Nov 14. 2011

    Thanks for the article Mark. I do use DRIPs when my investment strategy allows me to. My largest holding with a dividend reinvestment plan is Verizon.

  4. The Dividend Ninja

    Nov 14. 2011

    MoneyCone and DSO Thanx for posting guys! There are three more parts to follow 🙂

  5. My Own Advisor

    Nov 14. 2011

    Thanks Avrom, for allowing me to share some real estate on your site, if only for a few posts. I really appreciate this!

    @MoneyCone and DSO, thanks for the kind words. Stay tuned to Part 2 on my site, coming soon.

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