DRIPs may not be the most exciting investments around, but they are effective.
Under a Dividend Reinvestment Plan (DRIP) investors elect to use the cash that would be paid as a dividend to purchase additional shares of the underlying stock.
The purchase of additional shares happens automatically when dividends are paid, resulting in several advantages over other methods of accumulating shares in a company:
• The purchase of additional shares happens as soon as the dividend is paid.
As such, the cash from the dividend is put to work right away, rather than sitting as cash in your investment account until an investment decision is made.
• The purchase of additional shares under a DRIP is typically commission-free.
• Some companies will actually allow you to purchase the additional shares at a discount to market value.
The traditional way to set up a DRIP requires you to first acquire at least one share in a company then take delivery of the share or shares in paper form. There are fees involved – one to buy the stock and another to have a paper certificate sent to you.
The next step is to fill out DRIP enrolment forms and send them to the transfer agent for the company you’ve chosen.
A simpler approach may be to have your financial advisor set up your DRIP.
That’s easier said than done though, as only an estimated one in five Canadian advisors has the necessary licensing — and of those not all are keen on setting up plans that allow shares to be purchased without commissions.
But if your advisor is suitably licensed and willing, there are some advantages to this approach.
In addition to being simpler and less costly to set up, some Canadian full-service investment firms offer in-house DRIPs for virtually any Canadian publicly traded stock that pays a dividend.
There are some issues to consider with DRIPs. For example, the reinvested dividends are still taxed, which can pose a liquidity problem.
But regardless: for many investors DRIPs are a great way to systematically build their wealth.
For information on our Raymond James DRIP program feel free to contact us.
Jim Grant, CFP (Certified Financial Planner) is a Financial Advisor with Raymond James Ltd (RJL). The views of the author do not necessarily reflect those of RJL.
This article is for information only. Securities are offered through Raymond James Ltd., member-Canadian Investor Protection Fund. For more information feel free to call Jim at 250-594-1100, or email at jim.grant@raymondjames.ca. and/or visit www.jimgrant.ca
