Tuesday, November 17, 2015

To DRIP or not to DRIP?

One of my main goals as an investor is to be open to other points of view. Learning from the successes and failures of others will only help me in the long-term. To that end, after one of my favourite dividend bloggers, Monsieur Dividende, indicated last week that he DRIP-ped the shares in his RRSP, I decided to explore the possibility of DRIP-ping again.

Before my blogging days, I decided against enrolling in Dividend Re-Investment Programs (“DRIP”) run by companies in which I held shares. Such DRIP programs allow shareholders to use dividends earned from their shares to automatically purchase additional shares of the company. These additional purchases are usually done at no cost to the investor, and most of the time at a discount to the market price of the company’s shares. Even though DRIP programs are great in theory, I had some reasons for not enrolling in them:

1.       Time and cost to initially enroll in the DRIP. Having talked to my discount brokerage about five years ago about a DRIP that interested me, it quickly became obvious that there was some leg work I’d have to do before I was able to register for the DRIP. At the time, the effort required was greater than my perception of the benefit I’d realize once enrolled.
2.       The idea of buying shares at inopportune times. I like to buy shares in companies when they are on sale for less than I think they are worth. Call it market timing if you want, but I continue to prefer stocks trading near 52-week lows or that are being sold off for no company-specific reason.
3.       The satisfaction of cash deposited into my account stops. Having dividends deposited into my investment accounts each month opens up a universe of possibilities. I can use that cash for anything, including buying more shares of the company that gave it to me.

Of the above reasons, the second and third still hold true. In contrast, although there’s still some effort in enrolling in DRIP programs, my recent research suggests that it’s now a less cumbersome process. Additionally, I see a couple of obvious benefits besides buying additional shares of companies I like with no brokerage fees and at a discount:

1.       Negating the USD/CAD exchange rate. My brokerage offers me a low exchange rate when converting my USD dividends into CAD, and then charges me a high rate when I buy shares in US companies. By using USD dividends to buy shares directly through the US companies I own, I’d be removing my brokerage and their uncompetitive exchange rates from the investing equation.
2.       Using the discount in share price to accelerate my accumulation phase. Although the discount rate companies offer on their shares through their DRIP programs tend to vary between 0 – 4%, a decent discount rate can take the sting out of buying shares at higher prices than I’d prefer. Given I’m still in the accumulation phase, a couple percentage points of a discount rate could materially boost my dividend growth rate over time.
3.        Removing emotions from the investing equation. Building on the point above, it’s hard to argue with the mathematical reality of compound interest. As an investor, my emotions influence my investing decisions. Simply putting a portion of my portfolio on ‘automatic’ and letting compound interest work its magic seems logical.

Based on the above reasons and the fact that I don’t foresee any events that would require me using some of the dividends from my investments to cover life expenses, I’m going to further explore DRIP programs offered by some of the companies I own. In particular, I’m most interested to determine the level of discounts on DRIP-ping in some US companies in my RRSP in which I have a lot of confidence (i.e. Realty Income, Omega Healthcare, and Microsoft). I’ll keep you posted if I dip my toes into the DRIP waters.

Do you DRIP any of your dividend stocks? 

10 comments:

  1. Check with your broker. My brokerage provides automatic reinvestments of my dividends with no fees.
    D4s

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    1. Wow, the brokerages up here could learn from those south of the border. Sadly, I've never heard of a deal like that in Canada, and am 100% certain that my brokerage doesn't offer it.

      Thanks for stopping by!

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  2. ameritrade does provide automatic DRIP, its hassle free 1 email request away. Automatic tax deductions on foreign stocks (example, CAD stocks in USD automatic 15%) DRIP is not preferred, you can still deduct End of Year but its extra work for tax returns and $$ not working during some part of the year.

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    1. I appreciate the tip on Ameritrade! Thanks for stopping by Yuri.

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  3. Hey DIH! Thanks for mentioning my humble blog! You make a great case for both options and bring out some interesting infos on both. I didn't really studied the whole thing carefully like you did. So I'm happy to read about it. I only drip in my RRSP account (as of now). I want to be able to use the money in my TFSA and Non Registered Account the way I please. The way I see it for my RRSP is different : I could be stranded on a beach in the middle of nowhere and I wouldn't mind knowing I'm buying on a regular basis shares of JNJ, FTS, COP and BNS and so forth. I wouldn't for other companies I hold as well, but I prefer to have cashflow in them. If I ever get stranded on a beach, my money will accumulate and I will be happy to make huge buys once I get off my raft. ;-)

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    1. Bonjour M. Dividende - I meant to message you and warn you I was going to drop your name on this entry, but somehow managed to forget. Je m'excuse.

      J'aime beacoup ton idee de reposer sur un plage, et acheter les actions de JNJ sans inequieter! C'est vraiment genial!

      J'espere que tout va bien pour toi a Montreal! Merci pour votre commentaire et le tweet aussi!

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  4. Nice article.

    Fidelity also automatically drips without a fee if that's an option for you.

    I dripped everything when I started, but I stopped when I began to trade options as it was much cleaner to have no fractional shares and I needed a minimum number of shares per option.

    I do agree I really don't want to be re-investing when a stock is at it's all time high.

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    1. Sadly, Fidelity is not an option for Canadian investors. I'm envious of the various perks your US brokerages offer you.

      Out of all the negative points associated with DRIP-ing, buying shares at all time highs is my hardest mental hurdle to overcome.

      Thanks for stopping by!

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  5. Great article.
    RBC Direct offers automatic dividend reinvesting, but its a "synthetic drip" and therefore you lose the discount :(. Still fine for me though as a relatively new investor I cant afford to keep eating $10 trade fees to get rid of loose cash.

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    1. It's good to hear another Canadian discount brokerage is offering synthetic DRIPs as an option to investors aiming to minimize costs. I've also noticed that the $10 trade fees add up quickly.

      Thanks for letting me know about RBC Direct's offering. Much appreciated!

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