DRIP refers to dividend reinvestment plan. It is an equity investment option offered directly from the underlying company. The investor does not receive quarterly dividends directly as cash; instead, the investor's dividends are directly reinvested in the underlying equity. | |
1. What DRIP gets for you Take investing 400 shares in TransAlta Corp (Symbol:TA) as an example. The last quarterly dividend paying day was Jan 3 2012 and dividend is$ 0.29 per share. Without DRIP, you would get $116.00 cash ($0.29/share X 400 shares = $116.00). The cash would be deposit to your account on Jan 3rd and would be shown on your account on next business day Jan 4th. With DRIP, instead of getting $116 cash, you would get 5 shares plus $14.93 in cash. It means you get 5 new shares at the price $20.214 per share. If you take a look of the price on Jan 3rd for TA, the high is $21.40 and the low is $21.10. There is no fee for getting 5 new shares. Hmmm…, it is not a bad deal. (It usually takes one week to show the new shares and cash in your account.) This is perfect for long time investors in high quality stocks (like FTS, ENB) since your return will be compounded without extra fees. In TransAlta Corp’s case, you would get 20 new shares per year; in five years, your original 400 shares would increase to 500 shares. That means you would get dividend on 500 shares in five years. | |
| You will be happy if the stock price appreciated and dividend increased significantly during five year period; hopefully, the stock won’t work in the other way. That is why I say HIGH QUANLITY stock is critical for DRIP. Some of the companies also provide discount on DRIP. In TransAlta Corp’s case, it has 3% discount on the price. You can find the DRIP discount information in my blog. In summary, you can benefit from the followings: • No fee extra shares by reinvesting dividends • Long term compound returns on your investment • Discount at reinvesting dividends in new shares | |
2. How to enroll DRIP There are a couple of ways of enroll DRIP . • Through Transfer Agent. In Canada, there are two major players: CIBCMellon and ComputerShare. You have to meet two criteria: The first is you have to registered shareholder of the company you want to enroll the DRIP; And, The Company you invest must have DRIP program. This might not be a convenient way for average Joe. • Through your broker The easiest way to enroll DRIP, from my opinion, is call your broker. As far as I know not all brokers have this service; but banks’ breakage arm all have this service at different level. I am using TD Waterhouse and Scotia iTrade. They both provide DRIP service free of charge. | |
3. Market DRIP Traditionally, DRIP means treasury DRIP. It means you buy new shares from the company using dividends without fees (plus discount if applicable). This type of DRIP is called treasury DRIP. There is another option called “Market DRIP”. In Canadian stock market, there are lots of companies distribute dividends every quarter or month without DRIP. Many brokers have the service to use the dividends to buy stocks from the open market, the transaction fees will be shared by all investors enrolled in “market DRIP” program for the same stock. For example, Enecare (ECI) distribute $0.055 dividend per share per month and the company does not have DRIP program. You can enroll your broker’s market DRIP program. (This is subject to the availability of your broker’s service). Comparing to Treasury DRIP, Market DRIP has most of the advantages of Treasury DRIP. It has transaction cost and cost is shared by all enrolled investors. So, cost would be relatively low. Another disadvantage is there is not discount on the price. From my opinion, Market DRIP is a good option for high quality stocks. | |
Questions? Search it.
No comments:
Post a Comment