Intro to stocks
DRIP's or Dividend Reinvestment Plans, currently offered by approximately 1000 companies in North America, are programs which allow current shareholders to purchase stock directly from the company with their dividend income, bypassing your brokerage and the commissions. Essentially, the company offering the DRIP plan reinvests the cash dividends in additional shares. Most DRIPs also permit investors to make additional voluntary cash payments directly into the plans to purchase shares.
5 Step Program for DRIP Enrolment
If you are considering starting a DRIP program yourself, take a look at the five steps below. The minimal paper work to begin with pays off handsomely by lowering your commissions substantially over the long term.
- Step 1: Open a brokerage account (if you do not already have one):
- Choose a discount or full service broker; whichever serves your investment needs better. Remember to deposit sufficient funds in your new account to cover the initial transaction.
- Step 2: Buy one or more shares of your DRIP Company:
- Purchase the shares in the open market. You will incur an initial transaction fee, however, once enrolled in the DRIP, your subsequent purchases and re-invested dividends will result in no commissions.
- Step 3: Instruct your broker that you wish to have the share certificate(s) registered in your name:
- This will place you on the company's shareholder list, a requirement to be enrolled in the plan. The fee is usually quite reasonable, in the $25 - $30 range. Your broker will then send you your share certificate(s) (usually within two or three weeks). Remember to place your share certificate in a secure place such as your safety deposit box.
- Step 4: Once you have received the share certificate, call the company and ask for a DRIP registration form:
- When you receive the form complete it and return it to the company. At this point, your work is done. The company will handle all administration work and you will receive a transaction summary detailing your share purchases (with your dividends) after each dividend is paid. You should also receive a year-end transaction summary. Remember to save these records. They will be necessary to help you determine potential capital gains or losses when you eventually sell your shares.
- Step 5: Use the option to add cash on a regular basis (if applicable)
- Many DRIP programs allow you to add cash at regular intervals (quarterly, semi-annually, or yearly) to purchase more shares from the company's treasury. Not only do you incur no commission when purchasing via this route, the company may also offer its shares at a discount (2 % - 10 %) to their current market price. Indeed, by purchasing shares at regular intervals over time, you can take advantage of Dollar Cost Averaging (discussed above).
DRIP's were originally designed to help companies cut down on the mailing costs associated with quarterly dividend cheque mail outs. Corporations find them especially attractive in periods of high interest rates. Be aware that company DRIP programs carry no guarantees to continue indefinitely and may be dropped at the discretion of the corporation. For this reason, it may not be wise to invest all of your money in DRIP's. Indeed, just because a company has a DRIP plan, does not mean it is an excellent investment. In most cases, the presence of a DRIP program is just one of many factors you should consider when evaluating a potential investment.
Discount Brokerage DRIP's
Many discount brokerages now offer their own "quasi DRIP programs". Under these plans your broker automatically reinvests dividends from eligible companies in new shares. Rather than incur a full commission, you are charged a minimal fee ($1.00 - $3.00). Essentially, this method eliminates the need for you to register and store your own certificate, making the process more convenient.