Getting Started with Dividend Reinvestment Plans (DRIP) and Share Purchase Plans

A DRIP Money TreeThe following is a guest post from one of my favorite bloggers, Mark at My Own Advisor. If you’d like to guest post on the Dividend Ninja, be sure to check out our Guest Posting Guidelines.

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 provides 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 favorite stocks are always on sale.  Again, the company transfer agents do all the work. 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:

Hank Coleman wrote a superb guest post for me on DRIPs (Dividend Reinvestment Plans), in Five Reasons I Love Investing with DRIPs. After this post, I became really intrigued by the process of DRIPs, and the ability to contribute small amounts of capital per month and reinvest partial dividends.

As well, readers were asking questions on the process. I knew my good friend Mark at My Own Advisor, another Canadian investor had been DRIPping for years. I asked Mark if he wanted to write me a guest post on how to set up a DRIP for Canadians, from start to finish.

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

In Part-1, Mark defined what Synthetic DRIPs, Full DRIPs, and SPPs are, as well as the disadvantages and advantages of enrolling into these plans.

Question to My Own Advisor:
How can I get started with full DRIPs?

In Part-2, Mark continues with his series and explains to readers how to get enrolled with Full DRIPs. Mark also explains to readers, that although companies may offer Full DRIPs or SPPs, it doesn’t necessarily make a good investment. Investors should do their due diligence and research, as they would with any other purchase.

Getting Started with DRIPs and SPPs, Part -2 »

I’m not against option 1 or 2 above but I started my own foray into DRIPping a few years ago with option -3, through my own brokerage account.  I felt it was safer (rightly or wrongly) because I was in control of all the transactions but more importantly I already had a discount brokerage account. Let’s follow, step-by-step the process I used.

Ordering your first share

Step #1 – From my previous post, research the stock you are buying!!

Step #2 – Open a Discount Brokerage Account and put money in it

(If you followed Option # 1 or # 2 above you don’t need to follow this step. )

TD Waterhouse, BMO InvestorLine, CIBC Investor’s Edge, RBC Direct Investing or Scotiabank’s iTRADE are all excellent candidates for that.  I would suggest any one of these guys since you could get that first stock share yourself, by placing a trade online.  Take your time, do your homework and get an online broker that is known for its good customer service and one you feel comfortable dealing with.  Ask people, get opinions from them; read reviews and recommendations online.

If you’ve chosen one of the big five banks for your discount brokerage account as I did, find out how to put some money into it.  I suggest putting at least a few hundred bucks in the account initially, if not closer to $1,000.

Why? Many big-bank discount brokerages charge you a fee if you don’t have a certain threshold of assets with them, let alone a certain threshold of money in this discount brokerage account itself.  I recall most big-bank brokerages want you to have about $10,000 in assets in this account before any fees are waived.

CIBC Investor’s Edge charges something like $60 per year in fees if you don’t keep a balance of $10,000 or more; same with RBC Direct Investing.  I’d call them to be sure of their fee structure.  I also recall some discount brokerage accounts like Scotia’s iTRADE might charge you inactivity fees if you don’t keep a certain balance.  All this to say, please find out what you’re opening.   Read the fine print.  Shop around.  It’s your money right!?

In my case, years ago, I had over $10,000 invested already with one of these big banks, largely in mutual funds, so I just moved this account into a new discount brokerage account. I was fortunate to be over this threshold at my discount broker a few years ago, so I avoided the fees.

Step #3 – Buy the stock through your Discount Brokerage Account

(If you followed Option # 1 or # 2 above you don’t need to follow this step. )

How many shares should you buy?   This depends on how much you can afford to spend really.   Assuming you have some money in your brokerage account to avoid those account fees I mentioned, you have some investing knowledge and you’re ready for direct stock ownership (lots of assumptions I know), most full DRIPs only need 1 share for starters.  Using Bank of Montreal again as my example (pic below), you’ll see only 1 share is required for the folks at Computershare to get you going.  I’d suggest before you make any transactions with your online discount broker, contact the friendly people at Computershare or Canadian Stock Transfer Company to confirm minimum purchase requirements. They’re there to help you.

Computershare BMO DRIP criteria

Getting Your Stock Certificate…

Step #4 – Order the stock you purchased in “Certificated Form”

(If you followed Option # 1 or # 2 above you don’t need to follow this step. )

So you’ve made the buy and now you own at least one if not a few shares of the company you want to DRIP in your brokerage account. So far, so good!

Now, wait for the transaction to settle. That usually takes 2-5 business days.  After this time period has passed, based on the number of shares required to start your full DRIP, you need to request your discount broker to issue you the certificate.  This certificate will be sent to you via postal mail.

In our example, since Computershare wants 1 share of Bank of Montreal stock to start the DRIP, order 1 share from your discount broker in “certificated form”.   You’ll probably have to call your discount broker to make this request.  I remember I had to.

Some notes about this process:

  • Ensure your discount broker prints the share certificate in the same name you want to register your share with the transfer agent.  It just keeps things simple.
  • Ensure the broker sends the share certificate to the correct address.   You don’t want this certificate going somewhere else!?
  • Know that you’ll need to pay money for the share to be made in “certificated form”.   Big-bank discount brokers usually charge a fee of about $50 plus taxes or HST.  Some online discount brokers, so I’ve heard, charge much more.
  • Expect the certificate to take 2 or 3 weeks to arrive in the mail.

If you didn’t buy the share certificate from your discount brokerage account but instead got it transferred to you from someone you know, or from a Share Exchange Board, then you should have in your hot little hands, something that looks like this – a share certificate with your name on it:

Share Certificate

Whenever you get this share certificate, be careful with it.  Don’t use this certificate as a placemat or treat it like an older newspaper.  It’s worth money!   What you have done is take the stock the seller owned or you owned in your discount brokerage account, from its “street form” to full ownership under your own name.   So, when you get the share in “certificated form” ensure your name and address is accurate on it!

DRIP (Dividend Reinvestment Plan) and SPP (Share Purchase Plan) plans are an ideal way for investors to buy shares of their favorite companies, with small amounts of initial capital.

DRIPs combined with SPPs are especially powerful as they allow investors to dollar cost average their shares over the long run, avoid ongoing commissions, and to reinvest dividends into partial shares. It’s a win-win for investors who have the patience and long term commitment required. As Mark points out, “There’s do-it-yourself investing and then there’s really do-it-yourself investing.”

If you’re wondering why you should invest with DRIPs and SPPs in the first place, then be sure to read this superb guest post by Hank Coleman, Five Reasons I Love Investing with DRIPs, which inspired this series.

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.

17 Responses to “Getting Started with Dividend Reinvestment Plans (DRIP) and Share Purchase Plans”

  1. beaver

    Nov 18. 2011

    $50 to get one certificate,if i want to drip 30 stocks, does that mean i have to pay 1500 bucks fee to get start? sounds so pricy.

    • The Dividend Ninja

      Nov 19. 2011

      Hey beaver no it doesn’t work that way LOL. You only need to buy your first share – you can buy one share or ten shares to begin with. You then order your share certificate, a one-time $50 cost.

      Once you have your share(s) you then register it with the Transfer Agent (i.e. computershare) and sign up for the DRIP (dividend reinvestment plan) and the SPP (Share Purchase Plan).

      Mark will cover enroling in the SPP and DRIP plans, and then registering the share certificate in Part-4.

      One you are enrolled in SPP and DRIP you can then add shares as you want to at no additional cost, and also reinvest partial dividends! So the share certificate is only a one-time cost.

      Got it?

    • Maritime

      Dec 31. 2011

      If you want to get DRIP 30 different companies than I believe you would pay $50 dollars each for the each company to be registered in your name.

      To avoid this fee for each company, try to buy a share of each directly without a broker.

  2. My Own Advisor

    Nov 19. 2011

    You got it Ninja!

    Good question though beaver.

    Now beaver, if you wanted to DRIP 30 different stocks, well, then yes that would cost you money, your $1500 actually.

  3. René

    Nov 20. 2011

    Hello,

    Greetings from Germany.

    The website is very interesting and helpful for people, which have the wish for financial independence! I have a website in Germany with the articles over stocks with monthly payments. I think its fine to learn together.

    Many thanks for the informations. René Schmidt

    • The Dividend Ninja

      Nov 21. 2011

      Rene thank you for dropping by, nice to know the blog is read and appreciated in Germany 🙂

  4. beaver

    Nov 21. 2011

    thanks for the explains.

    If I choose option #1, after paying the share price + $10 fee charged by investors, any other fee? does this option avoid the $50 fee charged by brokerage?

    • The Dividend Ninja

      Nov 21. 2011

      Hi beaver! Yes that is exactly right 🙂

      If buy your first share certificate from someone you know, or from a share-board, then you only need to pay the $10 gratuity (that’s the usual); instead of the $50 brokerage certificate fee. It’s obviously a cheaper way to go, but you have to make sure the seller on the share-board has a good reputation, before you buy. Going through your brokerage is more expensive, but safer.

      There are no additional fees, unless the company specifies. You need to view the company DRIP and SPP plan on the Transfer Agent website (like computershare) to verify. But in the long run, the fees may be quite nominal.

      Cheers

  5. Lauri

    Feb 17. 2012

    Looking for part 4! Can’t seem to find it

  6. Marco

    Oct 27. 2012

    Hi Ninja,

    After contacting my discount broker (TD Waterhouse) they told me they dont ofter certificates in paper form. Is there another way to acquire that first share through my broker.

    Thanks so much

    • The Dividend Ninja

      Oct 27. 2012

      Marco, I do not believe you were given correct information, as paper stock certifiactes are available at $50. You simply phone and request that x no. of shares stock abc is made in certificate form, and they will mail the certificate to you.

      Let me know if you have any problems, and I’ll take it higher up at TDW. 🙂

      Cheers

  7. Dan

    Feb 10. 2013

    I have a itrade tfsa (tax free savings account) I have some BNS bank of nova scotia stoxk I would like to drip and spp. Can i do this in a tfsa. Once i get a share certificate and register drip and spp is this contained in my itrade account or a different account? Dan

    • The Dividend Ninja

      Feb 10. 2013

      Hi Dan,

      It’s important to understand the two different type of DRIPs. There is a “synthetic” DRIP through discount brokers, such as TD Waterhouse and Questrade etc. You have to have enough dividend income to reinvest at least one full share, you can’t do partial shares. A “full” DRIP is done through ComputerShare directly. You can invest in partial shares through their DRIP and SPP programs. The series was just pointing out that Mark, obtained his share from TDW, then used that share to enrol in the DRIP program with Computershare.

      No you cannot do a “full” DRIP in a TFSA or RRSP. You need to have the DRIP program through ComputerShare to do a “full” DRIP.

      However, two considerations come to mind. First, Questrade may have a hefty fee to issude a share certificate. And second, they may have a fee for anything withdrawn from your TFSA. This wouldn’t be a good way to go at all. You’ll have to phone Questrade and ask them about the cost and fees. 😉

      You would be much better off getting the share from a Share Club. Here is the difinitive site on Canadian DRIPs. It will probably answer most of your questions:

      http://www.dripprimer.ca/

      Cheers!

  8. Mike

    Apr 01. 2013

    If I hold a few hundred shares in a company and want to enroll in a DRIP, what is the process for ordering the shares in certified form? Won’t I need to convert all of the shares into certified form (not just one)? Will the discount brokerage charge more for this or will my holdings all be reflected on one certificate?

    Is the one share that is frequently referred merely to establish membership in the DRIP and enable practical additional purchases should the company offer a SPP?

  9. The Dividend Ninja

    Apr 02. 2013

    Mike,

    If you have enough dividend income to DRIP one full share, then your cheapest option is to keep your stock with your discount broker and DRIP it with them. That is called a “Synthetic DRIP”. You will only be able to DRIP full shares.

    There is a charge to issue a share-certificate from your discount broker, usually around $50.You can issue one or as many shares as you wish on that certificate. Or better yet you can get it from a “share board” for $10 plus share price. 😉

    That is correct, you only need one share to enrol in both the DRIP and SPP with a transfer agent such as Computershare.

    Cheers

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