Jon is a frequent commenter on this blog and I recently noticed that he has spent a lot of effort to put together an excellent primer on DRIPs for Canadians. Jon’s DRIP resources include a flow chart to get started with DRIPs, a FAQ and a list of Canadian companies offering DRIPs and SPPs and much more. Jon agreed to share his experience with DRIPs with our readers:
As a DRIPper, my goal is to build a large portfolio of companies, which have a history of paying and increasing their dividends. I do this through a company’s Dividend Reinvestment Plan (DRIP) and Share Purchase Plan (SPP), which is most cases, is completely free.
I started three years ago and now hold 7 DRIPs and I’m looking to add more. At first it was confusing trying to understand DRIPs, especially since I didn’t know where to go for help. I started my first couple DRIPs by buying shares in the open market through my discount broker and paying for a certificate, which was costly. Then, I discovered the DRIP Resource Center forums where investors can exchange single “seed” shares. Most plans require you have one share to be eligible, so I traded single shares as a way of expanding my DRIP holdings.
DRIPping does not suit everyone’s financial goals, but I think it’s a worthy investing method. Simplicity is the key: dividends buy me more shares for free and I can buy more by mailing in a cheque. Fractional shares are purchased and compounding works for you. Since I don’t plan on selling, I won’t face capital gains, and with the favourable tax treatment, I pay minimal taxes on my annual dividends.
I currently own CIBC (TSX: CM), Enbridge (TSX: ENB), H&R REIT (TSX:HR.UN), Telus (TSX: T), TransAlta (TSX: TA), Fortis (TSX: FTS), Scotiabank (TSX: BNS) and Johnson & Johnson (JNJ, in trust for my daughter) in my DRIP portfolio. My total returns were skewed in 2006 and 2007 due to the massive gain and subsequent drop in CIBC shares. More important to me is that the average dividend growth for my holdings was 13.5% in 2007. I would prefer stock prices to stay low so I can buy more shares at a discount. I should add I maintain a modest RSP portfolio and I have a pension plan at work, which complements my DRIP goals.
Many years from now, I look forward to “turning off” the DRIP before I’m retired and receiving dividends in cash. Wouldn’t you like to get paid for life?