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DRIPs are time-consuming, but worth it
Dividend reinvestment plans allow you to buy
more shares without paying commissions
What every long-term investor needs is a dividend reinvestment plan -- and a week or so of free time to research how to set one up.
It's basic investing advice to take advantage of the DRIPs offered by hundreds of Canadian and U.S. companies. These plans allow you to use your quarterly cash dividends to buy more shares of a company without paying brokerage commissions.
A few companies even give you a 5-per-cent discount off the price of their shares when bought through a DRIP. Others have an optional share purchase plan allowing you to invest new money along with your dividends.
Admit it, this DRIP thing sounds kind of good. In fact, you're probably wondering how and where to sign up.
That's where the week of free time comes in. While everybody sings the praises of DRIPs, finding step-by-step instructions on setting them up is surprisingly hard.
So here's a rundown on what you need to know. First, there are two main sources of DRIPs -- from a company itself in conjunction with the trust company that acts as its share transfer agent, and from a full-service or discount broker.
Generally, small investors without large positions in a stock will find the company DRIP most useful, even though it's a pain to get rolling.
The reason is that company DRIPs usually allow you to buy fractional shares. If you reinvest $20 in dividends from a company with a $30 share price, you'd end up with two-thirds of a share.
Most brokers, both full-service and discount, don't want the annoyance of keeping track of fractional shares, so they'll only buy full ones. If your dividend payments aren't sufficient to do this, then no DRIP for you.
If a company DRIP is the way to go then you'll first need to find out which firms offer them. A company's annual report will say if it offers a DRIP. Failing that, the Toronto Stock Exchange publishes an annual list that you can order for $20 plus tax by calling 416-947-4681. Right now, there are 110 companies on the list.
You can also check a few different sites on the World Wide Web, notably those offered by leading transfer agents CIBC Mellon Trust Co. and Montreal Trust. Both carry lists of the DRIPs they administer, including downloadable enrolment forms in many cases. Two other great sources of DRIP information are a wide-ranging investing site called Directions and the Web site operated by Canadian MoneySaver magazine.
The next step is to call your broker and request that the shares (you can start with as few as one) you want in the DRIP be registered in your name and then sent to you. According to the Directions site, discounters will charge $25 to $30 to do this. The cost is in addition to whatever commission you pay to buy your shares.
Once you've got your shares registered in your name you'll need to fill out a company's DRIP enrolment form and send it to the transfer agent. Either the company or the transfer agent can supply the forms.
That's all there is to it, unless you want to make your DRIP a registered retirement savings plan.
In that case, you'll have to set up what's called a single-purpose RRSP that will hold the shares of just one company. The annual trustee fee is $40 at CIBC Mellon.
Broker DRIPs are available at full-service and discount brokers, with the notable exception of E*Trade Canada. Broker plans vary widely, but they share a drawback in that you won't be able to top up your dividend reinvestments with new cash. For that, you'll need to deal directly with the company and its transfer agent.
Here are some questions to ask a broker about the DRIPs it offers:
How many stocks do they offer DRIPs on? The answer to this one varies widely. ScotiaMcLeod and Scotia Discount Brokerage have a list of about 80 Canadian stocks, while RBC Dominion Securities and Action Direct offer any dividend-paying stock on the TSE 300 composite index and the Standard & Poor's 100.
Can fractional shares be purchased? According to the Directions Web site, CT Securities, Charles Schwab Canada and Sun Life Securities offer fractional shares.
Are there any charges? No-cost DRIPs are available at CT Securities, Royal Bank Action Direct, Scotia Discount Brokerage, HSBC InvestDirect and Bank of Montreal InvestorLine, according to Directions.
How is the DRIP administered? At Scotia Discount, for one, a DRIP stock can a segregated holding within a larger investment account. At some other brokers, you'll need a DRIP-only account.
You'll have the easiest time if you have a big portfolio and use a full-service broker. Expedient, no-charge DRIP setups are just the sort of thing that justifies the big commissions that are charged.
HOW DISCOUNT BROKERS DO DRIPS
Broker Cost BMO InvestorLine* None CT Securities None on most stocks CIBC Investor's Edge* $1/dividend E*Trade No DRIPS offered HSBC InvesDirect* None National Bank Invest Net* None Schwab Canada Initial $10/stock + $2.50/dividend Scotia Discount Brokerage* None Sun Life Securities Initial $10/stock + $2.50/dividend TD Waterhouse* $1/dividend
-* Whole shares only
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