Tuesday, December 16, 2008

dividend re-investment plan (DRIP) example

Getting a DRIP Started

In May of 2006 I bought 40 shares of Royal Bank of Canada (RY) and registered the shares inside a dividend re-investment plan with their transfer agent, Computershare by contacting my broker and having them send the shares there. Computershare sent me the actual share certificate (below) 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 their common shareholders, like me, Computershare automatically reinvests that dividend into more common shares at the current trading price. They 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 $14.40 reinvested bought 0.29 shares
Nov. 24, 2006 $16.12 reinvested bought 0.30 shares
Feb. 23, 2006 $16.24 reinvested bought 0.29 shares
May 24, 2007 $18.81 reinvested bought 0.31 shares
Aug 24, 2007 $18.95 reinvested bought 0.35 shares
Nov. 23, 2007 $20.77 reinvested bought 0.41 shares
Feb. 22, 2008 $20.98 reinvested bought 0.42 shares
May 23, 2008 $21.19 reinvested bought 0.42 shares
Aug 22, 2008 $21.40 reinvested bought 0.47 shares
Nov 24, 2008 $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 their 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 their 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 $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.

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6 comments:

Dividends Anonymous said...

That's a GREAT example of an actual DRIP!

Dividend Addicts will be happy to read this as a featured post on Friday afternoon. One of the benefits of being a fellow Dividend Addict.

Cheers,
DA.

sampson said...

Hi MG,

My only issue is that brokers charge so much to issue stock certificates. With a good number of stocks in my portfolio (I'm aiming for 20-40 individual holdings), it would be very expensive to do this. I live with the synthetic DRIPs I'm afforded, and am pretty good at reinvesting dividends when I can (added to normal contribution amounts).

I know you hold a good number of stocks as well, so do you have the real DRIPs going for all that you can?

Traciatim said...

You can do DRIP style investing with piles of stocks over at ShareOwner Investments. It's great for picking a group of companies and buying groups of shares once or twice a year and also does fractional auto-DRIPing.

MG (moneygardener) said...

Thanks DA.

sampson - Good point. One note about certificates is that you should wait to enroll in the DRIP until you have built a significant position. Unless of course you want to benefit of a free share purchase plan etc.

I do not have real DRIPs going for all I can. I only DRIP RY, JNJ, MFC, and T.A. The balance of the divdidends are used for reinvestment in stocks of my choosing. I may set up synthetic DRIPs at some point in the future when I feel like putting something on auto-pilot.

Doug Mehus said...

MG,

I have considered becoming a registered owner from a beneficial owner of securities held in the name of my broker, Scotia Capital Inc. doing business as TradeFreedom, but one thing that concerns me is the fees. It's currently $50 per security to have the shares registered and share certificates sent by mail. That adds to one's overall cost base. Would you say it's worth it long-term?

Currently, I hold 75 shares of CM, 75 shares of TD, 25 shares of BNS, 134 shares of TFI and 264 units of YLO.UN.

Cheers,
Doug

MG (moneygardener) said...

Doug, I would wait until you build large positions that you won't be adding to anymore. I regreat starting these DRIPs when I did. I should have waited...