Dear Nancy Woods,
I own a Canadian dividend paying stock in my TFSA account and recently signed up for the dividend reinvestment option. While I understand some of the benefits of this option, especially minimizing investment fees, I wonder how exactly it works. Say, for example, that shares are trading at $40 and I earn $5 in dividends per quarter. Clearly, this is not enough to purchase another share. So what happens to the dividend payment?
In another context, I have seen fractional share statements (e.g. "You own 23.1235 shares in XYZ") but I wonder if that is simply accounting fiction since I don't think one can only hold 0.1234 shares in a stock. Can you better explain the related issues of dividend reinvestment and fractional share ownership?
When enrolled in a Dividend Reinvestment Plan (DRIP), you can do so in a couple of different ways. If you do it with the transfer agent where the shares are held they can purchase fractional shares. If your shares are held at a financial institution they may only be able to purchase whole shares. Any excess of the dividend would be paid in cash. In either case, sometimes a company may offer a price discount for shareholders enrolled in their DRIP.
The fractional shares you may have seen also happens with mutual funds. When the income from a mutual fund is reinvested, or for the straight purchase of a mutual fund, the number of units is expressed as a whole and fractional amount.
Nancy Woods, CIM, FCSI, is an associate portfolio manager and investment advisor with RBC Dominion Securities Inc. To ask her a question, send an e-mail to firstname.lastname@example.org
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