Drips – Investing made simple.
Drips – Investing made simple.
If you have been following me for a bit, I’m sure you would know how big of a fan I am of drip investing. Like the title says, it really does make investing easier. Drips are one of the fastest ways to compound your money/ investments organically, set it and forget it.
What Exactly is a Drip?
Drip stands for dividend reinvestment plan in the investment world. Essentially instead of getting cash dividends you can get more of that companies shares.
A lot of dividend paying stocks allow the drip program, but not all. Also some drips programs are for certain Country’s only. You can see if they do on their website or when your looking at the stock on your brokerage account.
Normally when you purchase a stock in your account there is some kind of trading fee but with the drip program all the new buys are free. Yup free! Companies would rather you keep investing in their company vs paying out money monthly/ quarterly etc etc. A lot companies also offer a discount on dripped shares. Algonquin Power for example offers a 5% discount from the average market price on dripped shares. Yes you instantly are up 5% on all your dripped shares. Winning!
Dripprimer.ca – is a great resource to see Canadian stocks and what discounts they offer to take advantage of their dividend reinvestment program.
Signing up For The Drip Program
You may be thinking, this sounds too good to be true. A discount on new shares and no trading fees or commissions? How do I get started?
Its actually very easy, go on your brokerage and sign up to drip your shares. I personally bank with Rbc direct investing, I just had to call them and they set it up. Unfortunately they are currently setup to only have all stocks drip or none. You cant pick and choose at the moment which stocks to allow to drip. (This can be a disadvantage if you feel a stock is overvalued and have enough income from that particular dividend stock to drip new shares)
It may take a couple weeks for it all to get setup, but once it is your laughing.
Full or Fractional Drip plans
Now you can sign up for just full share drip plans or fractional share drips. I think in Canada we can only do full share drip plans but correct me if I’m wrong. Now what is the difference?
Lets say company X pays you a cash dividend of 40 bucks. Its current stock price is 30 bucks. (For example sake the stock offers no drip discount.)
- With a full share drip you will get one additional share automatically and receive the 10 dollars difference in cash.
- A fractional share drip plan will invest the full 40 bucks and give you 1.3333 shares.
Fractional would be absolutely great for those higher priced stocks with low yields. Ie CNR Id love to drip this stock but will take quite the investment to drip the full share.
How do you calculate how many shares you will need to get that full drip? Lets use Enbridge for example.
We can see that Enbridge is Eligible for the drip program with rbc, now we need to figure out how many shares we need to receive another stock each quarter. The current price per share is $37.38 and we can see they pay 81 cents per share every quarter. So let’s divide that current share price by its dividend. We get 46.14. So we would need 47 shares to be able to drip a new share each quarter.
Another huge benefit of Drips
So we now know that dripped shares are commission free and can offer a nice discount on the new shares. (if the company offers that) They also make investing really simple by just reinvesting into companies that you already like. But what is another huge benefit?
Market Crash’s. Yes you read that right. A big crash wouldn’t be all the bad if your a long term investor. Some people would be trying to sell their stocks before the price plummets more etc etc….. But why panic? If you are dripping your shares, there is a very high chance you will get more shares and therefore lower your cost basis on your holding. Sweet!
A 10% plus market drop may actually allow certain stocks to drip in more shares. This is one of my favourite things about drips. Its all about getting more drips and letting that compounding work its magic! While everyone else is frantic, you can try to be more relaxed knowing it might actually benefit you long term.
Should I drip My Dividends?
The dividend reinvestment plan isn’t for everyone. I have read numerous bloggers who choose to not enrol in the drip program. They want the cash to buy the stock/s they are currently interested in or feel are undervalued. There is also a lot that love it. Personally I’m a huge fan, I own the stocks for a reason. I like them and feel they are good companies, Id love to keep acquiring more of them. Every month my new drips add to our forward dividend income.
I feel the Drip program is another great tool in the chest to help compound and grow your passive income through dividend investing. The other methods would be new cash being invested into the market and dividend raises. Combine all 3, and surely your snowball will grow!
Are you currently setting your dividends to drip? why or why not?
Go get those drips!
Hey I’m Rob, creator of Passive Canadian Income.
In 2011 me and my wife had almost $60,000 in debt and a negative $7,000 Net Worth. Through hard work and financial education we paid all that off. Now we are focusing on increasing our Passive Income Streams to make the money work for us. Feel Free to Follow along the Journey by clicking the Social Media links below or subscribing to get notified of new posts on the sidebar.