In a column a few weeks ago I looked at various ways to reinvest dividends. These included "true" dividend reinvestment plans, "synthetic" DRIPs and strategies using mutual funds and exchange-traded funds (ETFs).
I also asked readers to share their own ideas, which is where we'll pick things up today.
Some folks have put a lot of thought into this, which is great because reinvesting dividends is an excellent way to build wealth. Unfortunately, there's no one-size-fits-all strategy because commissions, investment minimums and products differ across discount brokers. That said, I'm hoping readers will be inspired by the work that others have put into designing their own DRIP solutions.
We'll start with Lynn B. (I'm leaving out surnames to protect people's privacy).
Lynn invests exclusively in ETFs and index mutual funds for the equity component of her portfolio, and where possible she uses synthetic DRIPs to reinvest dividends. The downside of synthetic DRIPs is that they allow purchases of whole shares only, which means some residual cash builds up in the account. Lynn's solution: She uses a special RBC savings account to mop up the cash in her portfolio each month.
"Dividends from any ETFs that don't qualify for RBC's synthetic DRIP go into this pool as well. At the beginning of each year I use the accumulated cash to rebalance the portfolio as necessary," she says.
The RBC savings account is purchased like a mutual fund and has a minimum investment of $500. The series she purchased (fund code: RBF2010) currently pays 1.25 per cent. This is a convenient solution for RBC Direct customers, but not all brokers make it so easy to park short-term cash. For instance, my broker, BMO InvestorLine, offers a high-interest savings account that pays 1.27 per cent, but the initial purchase is a much steeper $5,000.
Peter C., a TD Waterhouse customer, uses a combination of dividend-paying stocks and TD's low-cost e-series index mutual funds to make sure all of his money is working for him. He enrolled his stocks in TD's synthetic DRIP, and whenever the amount of leftover cash exceeds $100 – the minimum for an e-series fund purchase – he puts in a "buy" order to "soak up all the idle cash to the last penny. Easy, no hassle, cheap … works for me!" he says.
Another reader, Craig H., prefers to have more control over the timing of his purchases. What's more, he wants to avoid the "accounting nightmare" of having to track, for tax purposes, the adjusted cost base of shares acquired in small increments via a DRIP (note: this only applies to non-registered accounts).
His solution: "I like to collect my dividends until I have a pool of cash. Then I wait for a pullback in the market and make some purchases of stocks I like at a lower price," he says. Even though he pays a commission on each purchase, "I would think this strategy should beat the DRIP non-commission strategy."
To provide some discipline to the process, he also maintains a spreadsheet that includes target prices for the stocks he is looking to buy. "So if TD drops 8 per cent I will purchase more. Or if [Johnson & Johnson] drops 10 per cent I will possibly buy more – and so on. It seems to be working for me," he says.
Finally, Bob C. shared a novel method for tracking his portfolio.
In his non-registered synthetic DRIPs, his brokerage firm does the the ACB calculations for him. He'll need the ACB to figure out his capital gain or loss when he eventually sells his shares.
But Bob also does a separate calculation that shows his average cost per share based only on his initial investment. "For example, if I buy 100 shares at $10 each, my cost is $1,000. If in two years I have 110 shares and have not added any new money, my cost/share is now $9.09," he says.
"This allows me to see the actual increase in the value of my overall portfolio … it also makes the setbacks seem small."