There’s do-it-yourself investing, and then there’s do-everything-yourself investing.
Dividend reinvestment plans are an ideal example. An anomaly in this age of instant gratification, the classic DRIP requires patience and time to set up. The faster and easier approach: Have your online broker do it for you.
The online brokerage DRIP isn’t quite as good as the one you’ll get if you do everything yourself. But, hey, time is money. For some investors, simplicity is worth a little something.
DRIPs, no matter how you set them up, are one of the best bargains around. You almost never see the financial world doing so much for investors for so little cost. DRIPs are also a great way to slowly build wealth while going about your everyday business. Robert Gibb, a Victoria-based investor who was written widely on DRIP investing online and in Canadian MoneySaver magazine, calls them a “get rich eventually scheme.”
A DRIP starts with a stock that pays regular dividends. Each quarter, those dividends are gathered up to buy you new shares at no cost. As you acquire more shares, you generate more dividends and, in turn, get more new shares through your DRIP.
The classic DRIP requires you to, first, acquire at least one share in a company through an online broker and then take delivery of the share or shares in paper form. You’ll rack up two fees here – one to buy the stock and another to have a paper certificate sent to you – and the total cost could run close to $80. The next step is to fill out DRIP enrolment forms and send them to the transfer agent for the company you’ve chosen.
The classic DRIP has one giant advantage over the broker DRIP – it allows you to buy fractional shares. Let’s say you own 100 shares of TransAlta Corp., which pays a quarterly dividend of 29 cents. TransAlta has been trading around $22 per share these days, which means your 100 shares would net you enough to buy 1.32 new shares. If you had a classic DRIP going for your TransAlta shares, you would be credited with exactly 1.32 shares. With a broker DRIP, you would receive one share plus $7 in actual dividends. That’s why Mr. Gibb sums up broker drips as offering “only a partial dividend reinvestment.”
TransAlta is one of a group of companies that offer shares purchased through a classic DRIP at a slight discount to market price. TransAlta’s discount is currently set at 3 per cent, while other companies typically come in between 2 and 5 per cent.
Only in some cases do broker DRIPs let you benefit from discounts like these. The background here is that an online broker may participate in an actual company DRIP on behalf of its clients, or it may reinvest client dividends on its own. It’s only in the former case that the discount would apply.
Royal Bank Direct Investing says it participates in approximately 95 company DRIPs while offering dividend reinvestment in about 1,100 other companies. TransAlta is among the companies with a DRIP that RBCDI participates in directly, and thus the 3-per-cent discount is passed along to clients.
Another plus with classic DRIPs is that they offer the opportunity to participate in the share purchase plans offered by some companies. Basically, SPPs allow shareholders to buy shares directly through the company with no commissions in most cases. It’s unlikely you’ll find an online broker that lets its clients use a company’s SPP.
