A Dividend Reinvestment Plan or (DRIP) is a service that you can set up with a company, with which you own stock, where the dividends paid by the company are automatically used to purchase additional shares of the company's stock. Therefore, you will never actually receive the dividends in cash; instead they will be used to buy more of the company's stock. Among the several stock investors that I know, there seems to be a dichotomy of opinion on whether or not a DRIP is a useful tool for a long term investor. It is important to note the DRIPs vary by company as to how their plan works, and not all DRIPs are free of fees. Not all DRIPs are created equal! In Canada there are two main companies that administer DRIPs for Canadian corporations. These companies, which are called transfer agents are Computershare and CIBC Mellon
I currently have 4 of the 15 stocks that I own enrolled in a DRIP plan. These 4 DRIP'd stocks are:
Johnson & Johnson (JNJ) - Computershare
Royal Bank of Canada (RY) - Computershare
Telus (T.A) - Computershare - Share Purch. (SPP) as well. - Best DRIP
Manulife (MFC) - CIBC Mellon - small fee ass. with DRIP - Worst DRIP
These are all companies that I plan to hold for the long term (ie at least 15 - 20 years).
Reasons I like, & ADVANTAGES of using a DRIP:
- Usually FREE of charge - this eliminates the trading fees that you would normally encounter when adding to current stock positions
- Great tool to employ the magic of COMPOUNDING. Dividends buy more shares which in turn produce more dividends. Fractional shares (ie 1/10) of a share, still produces a dividend.
- NO HASSLE. DRIPs will continue to operate without you lifting a finger. Your stocks will still reproduce while you sipping a Pino Colada on a 4 week all inclusive vacation in the Mayan Riviera.
Reasons I don't like, & DISADVANTAGES of using a DRIP:
- Once a DRIP has been set up, your capacity to buy stocks when they are cheap is diminished. You do LOSE the ability to add to a position on a down day, or buy on a dip.
- Some DRIPs do not include a Share Purchase Plan (SPP). In these cases this means once you are locked into a DRIP you CAN NOT ADD to this position.
- A limitation of a DRIP for a smart investor is that you must be completely sure of your long term confidence in the company. If you select a company to DRIP, this is a COMMITMENT to this company for the long term as your investment is more difficult to access quickly, and the whole point of a DRIP is to let it ride long term.
Overall I am on the fence with respect to DRIPs. There are certainly advantages and disadvantages as I've indicated above, and much of the decision of whether or not to DRIP is up to one's individual investment style and goals.
It is important to note that there is another form of a DRIP available which is called a 'SYNTHETIC DRIP'. A synthetic drip can be set up directly with some discount brokers. This type of DRIP works the same way as a conventional DRIP except for the fact that a synthetic DRIP will not purchase fractional shares. For example if a stock is trading at $20 and your quarterly dividend amounts to $19, the DRIP will not buy anything. If your quarterly dividend amounts to $39, the DRIP will only buy 1 share, and will leave $19 cash in your account. This is a disadvantage, as you do not get your entire dividend amount re-invested, however an advantage of a synthetic drip is that the company shares are still with your broker so you can add to them anytime (on dips etc.). I have not yet set up any synthetic drips, however I do think these are attractive and I may set them up in the future for some holdings.
If anyone has any experience with Synthetic DRIPs, and would like to provide some feedback on how they work with certain brokers please comment.