Reader Mail: Dividend Re-investment Plans (DRIPs)

A few days ago I received an email from a reader who wanted to know about dividend re-investment plans (DRIPs).  Specifically, the difference between a synthetic and true DRIP.  If you follow this blog then you know that I’m a huge fan of dividend re-investment plans or DRIPs.  They’re an excellent way for investors to grow their wealth little by little over time.

Here is the email and my answer below:

I have a few questions about setting up DRIP accounts and using transfer agents. I use BMO Investorline to buy stocks(shares) with various financial institutions and dividend ETF’s. I have received dividends quarterly or monthly, however, they are never reinvested into more shares or partial shares. I asked BMO about this and they said that they will not reinvest in partial shares, only whole shares but that I was registered for drip. Is this a synthetic drip? I am not understanding why getting a share certificate is required to register into a true DRIP account? Can I do this with my BMO brokerage agent? Or as you said it would cost $50 per certificate. Why do you use Computershare and Canada Stock Transfer and how does this differ from BMO Investorline discount brokerage? If I decided to transfer my existing funds to those to save on paying BMO commission fees every time I purchase shares, do you know if there will be a fee to do so? I am have been investing for about 6 years on BMO Investorline, and although my investments are doing ok, I would like to improve my returns and reinvesting those dividends into more shares.

First off, yes this is a synthetic drip. The key thing to remember about that is that in order for you to receive at least 1 additional share in a stock or ETF that you are dripping, you must own a sufficient number of those shares so that the amount you receive on a quarterly or monthly basis is greater than the share price at the time you receive the dividend.

Let me give you an example. Scotiabank (BNS) pays $0.66 per share, per quarter. If the share price on the dividend pay date is $66, in order for me to be able to reinvest the dividend to get 1 additional share, I must own at least 100 shares. In a synthetic DRIP you can only purchase whole shares.  So the fact that you mention you are enrolled in the DRIP program at BMO would suggest that you do not own a sufficient number of shares in a given company to be able to acquire at least 1 additional share through reinvesting your dividend.

The main advantage of a true DRIP is that it allows you to make small cash purchases of shares in a given company on a commission-free basis. For instance, BCE offers a monthly share purchase plan with no minimum. So in a given month you can purchase $5,$10, $50, $100 etc of BCE up to a maximum of $20k annually. So the existence of these plans allows the small-time investor an opportunity where he or she could send a small amount of money to purchase both whole and fractional shares of a given company.  In my experience, investing a small amount of money on a regular basis is a lot more manageable then saving up a large sum and investing it all at once.

I like to use true DRIPs for any money I invest outside of an RRSP, TFSA or RESP because I can send $50 or $100 at a time to purchase more shares in my favorite companies.  Because the amounts are relatively small it really isn’t worth paying the $9.99 commission to buy 1 or 2 shares through my online discount broker.  If I got a windfall of a few thousand dollars then I would definitely be buying more shares in my discount broker.

I won’t go into too much detail about the advantages and disadvantages of purchasing shares through an online discount broker versus a company transfer agent because I’ve already covered that in a previous post.  Suffice it to say that true DRIPs are offered only for non-registered investment accounts.  So if your money is in an RRSP, RESP or TFSA then you won’t be able to participate in a true DRIP.

Without knowing the value of the portfolio, your risk profile and asset allocation, not to mention whether or not your account is tax-sheltered, it is difficult for me to answer the question of whether or not you should move your investments from a discount brokerage to a transfer agent.  How much money do you invest in a given year?  If you invest thousands of dollars you may want to stay with BMO.  On the other hand, if you only have $50 or $100 a month to spare beyond any RRSP or TFSA contributions then you may want to get started in a true DRIP.

Let me say that in general most people who use true DRIPs eventually migrate their investments toward online discount brokerages.  Yes you’ll pay a bit more in commission fees, but those accounts offer a lot in the way of convenience.  I wouldn’t worry too much about not being able to purchase fractional shares.  Personally, as long as I’m able to get at least 1 extra share per dividend pay date I’m happy.

Again, without having the full details of your situation I can only speak to what I do with my investments.  In my registered and non-registered discount brokerage investment accounts I enroll in the synthetic DRIP and I keep buying the same shares in the same companies until I have enough quarterly dividend income to purchase at least 1 additional share.  So, for example, I’ve been buying Scotiabank shares for my TFSA because I hadn’t yet reached the point where my quarterly dividend income from that company could get me at least 1 more share.

If you are determined to get involved in a true DRIP, then I would suggest you get your first share certificate through dripinvesting.org.  Doing it that way will cost you about $10 plus the closing market price of the share.  You could acquire one through BMO but you would have to pay $50 plus the closing market price of the share.  For more detailed instructions on exactly how to go about acquiring your first share certificate read my post on how to set up DRIPs.

Have a great weekend and I hope this helps.