Using DRIPs for Faster Compounding of Dividends 14 comments
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Dividends have historically contributed 35% - 40% of annual total returns over the past century. Re-invested dividends however are touted to have provided 97% of S&P 500 total returns between 1871 and 2008.
The main pro of dividend reinvestment is that you get the power of compounding in your favor. If you have also picked a solid stock that tends to increase the payments to stockholders every year you are essentially turbo charging your portfolio for the long run and should expect to receive even faster annual dividend raises.
There is another way to compound your dividends to the third degree using dividends reinvestment plans (DRIPs) which allow participants to reinvest the cash dividends in additional shares of common stock at a discount. Drips are a nice low cost way to purchase dividend stocks and build a stock portfolio. These programs allow investors to purchase shares in two ways either through reinvesting dividends or with optional cash payments that can be sent to the companies you want to invest in. One benefit of drips is that they allow dividend reinvestment in partial shares. Check out my recent review of DRIPs.
The most valuable benefit of drips is that some allow reinvesting your dividends by purchasing shares at a discount to the market price. This is an inexpensive way for these companies to raise capital.
I have provided a sample list of dividend reinvestment plans, which allow participants to reinvest the cash dividends in additional shares of common stock at a discount. It’s not a recommendation to purchase however:
If you are aware of any other drips offering a discount on dividend reinvestment, please add your comment below.
It’s interesting to note that most major companies that offer discount on dividend reinvestment plans are Canadian. Major banks such as Bank of Montreal (BMO), Bank of Nova Scotia (BNS), Toronto-Dominion Bank (TD) and Royal Bank of Canada (RY) dominate the list. Canadian Income Trusts such as Pengrowth Energy Trust (PGH), Penn West Energy Trust (PWE) and Harvest Energy Trust (HTE) also reward shareholders with reinvesting their dividends by purchasing shares at 5% discount to the market price.
Few US companies are currently offering discounts on dividend reinvestment through their DRIPs. With the credit crunch I would expect companies to provide an additional incentive for shareholders to keep reinvesting their dividends through the company’s plan in order to have an easy way to finance operations.
It is important to understand however that these discount prices could be determined differently in different drips. Thus always consult the plan documentation for further details concerning specific DRIPs. Buying stocks just for the dividend reinvestment discount shouldn’t be the main reason behind the purchase. Always analyze each individual stock before investing in it.
Disclosure: Author is long TD
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This article has 14 comments:
My DRIP with PWE is still with my broker. It gives me dividend re-investment but NOT the 5% discount.
It depends on if you want the disount or not. And honestly, the initial set-up is a PITA requiring verification for Canadian money laundering.
Whoa - hold on! I like dividends immensely (esp. in the emerging markets, where there really isn't any other proof that management is acting on behalf of all the shareholders, rather than using corporate coffers as a personal piggy bank) - but 97% seems excessive, particularly when you factor in taxes and other means of compensating shareholders.
In terms of strategy, seems that using a discount broker with free dividend reinvestment (e.g., Sharebuilder, and several others) is a better way to go than to grasp for an extra 2-5% on an equity you might not want.
the drips are killing us too these days with fees.
so they are good, agree somewhat, but find one without fees and a discount and be aware.
what I do now is take all my divs ea month and average into another buy, since my Fidelity is at 8$ to trade, it costs very little to do this. so if I buy 200 shares of PGH to add to that, the fee is lower and I can manage my portfolio better.
In Canada it is customary to take possession of a one (1) share certificate only. This known as removing a share from "street name". If you have 100 shares of BMO for example you could remove one share from street name and leave 99 with your broker. The dividends from the 99 are delivered to your brokerage account. The dividend from the one out of street name will be reinvested to 7 decimal places in an account held with a trust company (aka Transfer Agent or TA) on behalf of BMO.
You could ask, "Why bother?"
The answer is that 12 times a year you can now buy further shares directly from BMO (through the TA) commission free in small dollar amounts. BMO's lower limit is $0.00 therefore it would seem possible to send them a cheque for an optional cash purchase of $0.01 which they'd reinvest commission free to 7 decimal places. Dividends are reinvested commission free as well.
This is an outstanding way to take advantage of income or dollar cost averaging. Note: payments are entirely optional. You are not required to send at any time.
As for dealing with the one (1) share certificate there is tremendous action on the exchange board at dripinvesting.org
Once your account is up and running you don't need the single and someone at dripinvesting will offer to buy it from you under our Guidelines. The site is strictly hobbyist.
As for how to start a DRIP check out this article:
www.dripinvesting.org/...
OB
RIPS!!!!!!!!!!
You rock!!!!!!!
That is exactly what you have. More importantly, as a portfolio manager, I would rather decide how to allocate my dividend income actively. This give me the opportunity to allocate the cash where it is most beat up, or in the case of potential RIPS, take a pass.
YOU MAY HAVE CREATED A NEW BUZZWORD TODAY. . .
On Mar 25 06:32 PM Annualgain wrote:
> Many DRIPs have recently become defunct due to abandoned dividends.
> (What are they called if the dividend is suspended - RIPs?)
But I have found some very good plans. Not all plans require you to register the stock in your own name before you can invest. For example, I enrolled in DUK's plan, and though I do have some shares in my brokerage account, I did not want to pay a fee to have it registered in my name, and I simply had to do a initial investment with DUK of at least $250. The only fee involved in the plan is a (currently) 5ยข commission (per share) when selling the shares. PFE also has a very good plan (though I believe it required an initial investment of $500).
If you are a long-term investor, a DSPP might be a very good idea, especially if you can only put in a little bit at a time.
2 studies I've run show 75% of DRIPpers invest $300 or less per month.
Interactive Brokers with it's minimum monthly charge of $10 is not a good fit for many of these investors.
The comments :
<i>More importantly, as a portfolio manager, I would rather decide how to allocate my dividend income actively. This give me the opportunity to allocate the cash where it is most beat up,</i>
are well taken as I've long advocated true DRIPping occurs when you collect all dividends in cash, instead of reinvesting, and then allocate them with an optional cash payment to where you see the best opportunity. Simply just reinvesting them by definition gives you an average return on your dividends as you are income averaging.
OB