How to Get a DRIP Started

Dec.17.08 | About: Royal Bank (RY)

Getting a DRIP Started

In May of 2006 I bought 40 shares of Royal Bank of Canada (NYSE:RY) and registered the shares inside a dividend re-investment plan with the bank's transfer agent, Computershare, by contacting my broker and having them send the shares there. Computershare sent me the actual share certificate because the moment I registered for the dividend re-investment plan the shares were actually held with Royal Bank as opposed to held with my broker as my representative. Royal Bank uses Computershare to coordinate these services, but technically my 40 shares are now held directly with the company.

How It Works

Each quarter when Royal Bank pays a dividend to its common shareholders, like me, Computershare automatically reinvests that dividend into more common shares at the current trading price. It will even purchase fractional shares as opposed to shares purchased within a synthetic DRIP (with broker), which means that Computershare doesn't need my dividend amount to be sufficient to buy one whole share. Here is what my actual dividend payments have looked like:

Aug. 24, 2006 C$14.40 reinvested bought 0.29 shares

Nov. 24, 2006 C$16.12 reinvested bought 0.30 shares

Feb. 23, 2006 C$16.24 reinvested bought 0.29 shares

May 24, 2007 C$18.81 reinvested bought 0.31 shares

Aug 24, 2007 C$18.95 reinvested bought 0.35 shares

Nov. 23, 2007 C$20.77 reinvested bought 0.41 shares

Feb. 22, 2008 C$20.98 reinvested bought 0.42 shares

May 23, 2008 C$21.19 reinvested bought 0.42 shares

Aug 22, 2008 C$21.40 reinvested bought 0.47 shares

Nov 24, 2008 C$21.63 reinvested bought 0.52 shares

As you can see, each quarter the dividend that Royal Bank has paid me has been higher than the previous quarter. The reasons for this are as follows:

  • Royal Bank has increased its dividend during this time frame (parents have more babies)
  • Shares that were purchased with the previous dividend payment generate dividends for the current dividend payment (babies have babies)

Also the amount of shares purchased with each dividend payment is trending up. The reasons for this are as follows:

  • Royal Bank has increased its dividend during this time frame
  • Royal Bank's share price has fluctuated, and has trended down over this period, enabling more shares to be bought with the same C$1 of dividend, especially lately

In summary, a weak share price and a rising dividend are the best conditions for the value of your holdings within a DRIP to grow. Even if the dividend rate is constant, a low current share price is beneficial to DRIP investors, as long as the share price is expected to be higher at some point in the future. In my case, I plan to hold these Royal Bank of Canada shares for at least 15 years, so currently a weak share price is welcome.