Skip to main content
The Globe and Mail
Support Quality Journalism
The Globe and Mail
First Access to Latest
Investment News
Collection of curated
e-books and guides
Inform your decisions via
Globe Investor Tools
Just$1.99
per week
for first 24 weeks

Enjoy unlimited digital access
Enjoy Unlimited Digital Access
Get full access to globeandmail.com
Just $1.99 per week for the first 24 weeks
Just $1.99 per week for the first 24 weeks
var select={root:".js-sub-pencil",control:".js-sub-pencil-control",open:"o-sub-pencil--open",closed:"o-sub-pencil--closed"},dom={},allowExpand=!0;function pencilInit(o){var e=arguments.length>1&&void 0!==arguments[1]&&arguments[1];select.root=o,dom.root=document.querySelector(select.root),dom.root&&(dom.control=document.querySelector(select.control),dom.control.addEventListener("click",onToggleClicked),setPanelState(e),window.addEventListener("scroll",onWindowScroll),dom.root.removeAttribute("hidden"))}function isPanelOpen(){return dom.root.classList.contains(select.open)}function setPanelState(o){dom.root.classList[o?"add":"remove"](select.open),dom.root.classList[o?"remove":"add"](select.closed),dom.control.setAttribute("aria-expanded",o)}function onToggleClicked(){var l=!isPanelOpen();setPanelState(l)}function onWindowScroll(){window.requestAnimationFrame(function() {var l=isPanelOpen(),n=0===(document.body.scrollTop||document.documentElement.scrollTop);n||l||!allowExpand?n&&l&&(allowExpand=!0,setPanelState(!1)):(allowExpand=!1,setPanelState(!0))});}pencilInit(".js-sub-pencil",!1); // via darwin-bg var slideIndex = 0; carousel(); function carousel() { var i; var x = document.getElementsByClassName("subs_valueprop"); for (i = 0; i < x.length; i++) { x[i].style.display = "none"; } slideIndex++; if (slideIndex> x.length) { slideIndex = 1; } x[slideIndex - 1].style.display = "block"; setTimeout(carousel, 2500); }

John Heinzl is the dividend investor for Globe Investor's Strategy Lab. Follow his contributions here. You can see his model portfolio here.

Reinvesting dividends is one of the surest ways to build wealth. But as Dave Hook discovered, it's not as easy as it sounds.

Some stocks and exchange-traded funds that qualify for dividend reinvestment plans (DRIPs) at one discount broker don't qualify at another, as he found out when he opened an account at one of the big bank-owned firms.

Story continues below advertisement

What's more, because most broker-operated DRIPs only allow reinvestment in whole shares – not partial shares – some cash invariably builds up in his accounts. Not only does the orphaned cash sit idle for months – defeating the purpose of a DRIP – but he has to pay a commission if he decides to reinvest it.

"I'd like [reinvestment] to be automatic. I'd like to invest in partial shares," says the retired Barrie, Ont., resident. "That would make it so much easier."

To be sure, Mr. Hook's situation is more complex than most: He and his wife have 11 accounts at four different financial institutions – some chosen specifically for their DRIP policies. But his frustrations are shared by plenty of other dividend investors.

Here's a rundown of the advantages and disadvantages of some common dividend reinvestment strategies:

The "true" DRIP

  • How to set it up: You need to buy at least one share through a broker, and then have the share(s) registered in your name and the certificate be mailed to you at a cost of about $50. Alternatively, you can avoid fees by purchasing a share in a private exchange (more information at dripprimer.ca). You then enroll in the DRIP administered by the company’s transfer agent.
     
  • Advantages: Allows for partial share purchases, so every penny of your dividend is reinvested. Some DRIPs also permit subsequent share purchases with no commissions.
     
  • Disadvantages: Not available for shares in registered accounts. For tax purposes investors must track the adjusted cost base (ACB), which changes with each reinvestment. No control over reinvestment price.

The "synthetic" DRIP

  • How to set it up: Check the list of stocks and ETFs that are eligible for your broker’s “synthetic” DRIP. Call your broker to enroll your shares.
     
  • Advantages: Easy to set up. Most brokers will track the ACB for you. Available for shares in registered and non-registered accounts.
     
  • Disadvantages: No partial shares. No control over reinvestment price. If dividend is not sufficient to purchase at least one share, no money will be reinvested. This can be a problem with monthly-pay ETFs because the dividend amounts are small. On the plus side, some brokers – including Scotia iTrade, Virtual Brokers, QTrade and Questrade – offer commission-free ETF trades, with certain restrictions.

The mutual fund DRIP

Story continues below advertisement

  • How to set it up: When you purchase a mutual fund, request to have the distributions reinvested instead of received in cash.
     
  • Advantages: Simple. Allows for full reinvestment, including partial units. Plenty of funds to choose from. Can be used in registered and non-registered accounts. No commissions to buy or sell.
     
  • Disadvantages: Mutual fund management expense ratios (MERs) are typically higher than ETFs and can exert a drag on returns. To keep costs down, consider index mutual funds.

The hybrid DRIP

  • How to set it up: Purchase a small amount of a mutual fund and use it to “soak up” dividends from stocks and ETFs when enough cash accumulates to meet the fund’s minimum purchase level.
     
  • Advantages: Keeps costs low because the mutual fund is only a small portion of portfolio. Can control timing of reinvestment. No commissions to buy or sell fund units.
     
  • Disadvantages: Depending on the fund and account size, it might take a while to build up enough cash for the fund’s minimum purchase. High MERs of some funds.

The DIY DRIP

  • How to set it up: In a portfolio of stocks and/or ETFs, simply let cash accumulate until you decide to add to a position or invest in a new security.
     
  • Advantages: Gives you complete control over reinvestment timing and price. Can be used in any account.
     
  • Disadvantages: Not automatic. Commissions to buy and sell stocks and ETFs (unless you use a broker that offers free ETF trades).

Closing thoughts

There is no single best strategy for reinvesting dividends. The important thing, if you don't need to spend the cash and want to maximize the benefits of compounding, is to redeploy your dividends so that they, in turn, can generate more dividends.

"A perfect solution will always be elusive," Mr. Hook says. But whatever method you use, reinvesting "is absolutely essential to a dividend strategy."

Got a creative dividend reinvestment strategy? Tell me about it. E-mail jheinzl@globeandmail.com

Report an error Editorial code of conduct
Due to technical reasons, we have temporarily removed commenting from our articles. We hope to have this fixed soon. Thank you for your patience. If you are looking to give feedback on our new site, please send it along to feedback@globeandmail.com. If you want to write a letter to the editor, please forward to letters@globeandmail.com.

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff.

We aim to create a safe and valuable space for discussion and debate. That means:

  • Treat others as you wish to be treated
  • Criticize ideas, not people
  • Stay on topic
  • Avoid the use of toxic and offensive language
  • Flag bad behaviour

Comments that violate our community guidelines will be removed.

Read our community guidelines here

Discussion loading ...

To view this site properly, enable cookies in your browser. Read our privacy policy to learn more.
How to enable cookies