Personal Finance

Dividend-reinvestment plans let you put your idle cash to work.
By Gail Bebee | 14/10/10

For those of us who hold dividend-paying stocks and are in the asset-accumulation stage of life, it can be annoying to watch cash distributions trickle into our accounts, and have to wait for months until the sum is big enough to make a new purchase. Fortunately, this essentially dead money can immediately be put to work if the stocks you own have dividend-reinvestment plans.

About the Author
Gail Bebee is an independent personal finance speaker, teacher and the author of No Hype--The Straight Goods on Investing Your Money. She can be reached at gbebee@gailbebee.com; her website is www.gailbebee.com.

Companies offering these plans, known as DRIPs, allow shareholders to automatically reinvest dividends in additional company shares, usually without paying commissions. Some companies -- such as CIBC CM, the electrical-utilities company Emera Inc. EMA and the telecommunications provider Telus Corp. T -- go a step further and give a discount on shares purchased via a DRIP. If you are interested in a particular DRIP, it's always a good idea to check the company's website to confirm the DRIP terms, since purchase discounts can change.

Currently, at www.dripprimer.ca you can find a list of more than 50 Canadian stocks that offer DRIPs. This website also provides details on companies with stock-purchase plans, a related service that allow investors to purchase stocks directly from the companies at specific times at reduced or no commission. South of the border there are many more DRIPs to choose from. For instance, www.stock1.com lists more than 1,300 U.S. companies that offer DRIPs.

While DRIPs enable you to save on transaction fees and take advantage of the compounding effect of dividend reinvesting, they're not for everyone. You have no choice in the price at which your dividends are reinvested.

Setting up these plans takes some work and includes buying at least one share of each company for which you wish to enrol in a DRIP, having each share certificate registered in your name and then contacting each company to enrol in its plan. Besides the commission to purchase a share, you'll pay a fee to register. Most discount brokers charge about $50 to do so.

The most annoying problem with DRIPs, in my view, is the ongoing record-keeping required for income-tax purposes. You need to record the purchase price of all those DRIP shares so you can calculate capital gains payable, assuming that you sell the shares at a profit.

If you have DRIPs with 15 companies, all paying quarterly dividends, it adds up to 60 discrete entries every year. Forms are available at http://dripinvesting.org/Tools/dripspreadsheet.htm to assist you with this tedious chore.

A practical alternative to DRIPs, and one that avoids their hassles while conferring many of their benefits, are the synthetic dividend-reinvestment plans available at some investment firms. These plans allow clients to reinvest certain companies' dividends in additional shares or units. This useful service is free or at low cost, reduces your commission costs and ensures that dividend dollars are promptly reinvested. On top of that, they keep track of the book value of all your stock purchases.

If you want to participate in one of these plans, it's as easy as a phone call to your financial advisor or discount brokerage to request that this option be activated. There are, of course, tradeoffs. As with company DRIPs, you do not get to choose the purchase price when the dividends are reinvested.

Some firms may require that dividends of all eligible shares in your account be part of the DRIP. Generally, only full shares can be purchased, so you'll have small amounts of cash accumulating in your account.

While dividend-reinvestment plans are a seemingly effortless way to pursue your financial goals, they do require a bit of work. During your periodic portfolio reviews, evaluate whether you should continue to own your DRIP companies. As well, you may need to rebalance your holdings as companies paying high dividends can quickly become too large a part of your portfolio.

Overall, DRIPs are a cost-effective, low-maintenance way to invest. If you are not taking advantage of some form of these plans, it's definitely worth looking into how they might fit into your investment strategy.

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