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Dividend Reinvestment Plans for Canadians
Dividend Reinvestment Plans
Disclaimer: In the following series, I'm going to describe some strategies that may not be suitable for you, you need to act according to your own financial conditions.
What is DRIP (Dividend Reinvestment Plan)?
A Dividend Reinvestment Plans, are the plans offered by some Canadian companies to help you buy single share/stock of a company directly without any brokers.
With every Dividend you receive from these companies are automatically reinvested in the company and in turn producing higher returns over time.
This is a not a shortcut to success, it is a strategy for those people who can buy stocks at a very low price without paying any Broker's commissions or fees. In short start small and grow your money. It is better to sow the plant of DRIPS, to reap its reward later.
Some people say that Drips is a road to financial freedom. In this article, I will discuss about as why it is.
Benefits of DRIPS
You may not have $10k to invest in stocks, you may even have $10k but investing in stocks is risky if you are a gambler / Speculator and may loose your entire investment. By enrolling with drips with the company, you can purchase a single share as low for $40 to anywhere around - $50.
If you buy thru broker, you will have to pay brokers fees and commissions that can eat your investment and broker may require you to minimum buy 100 shares and deposit minimum $5000-$1000, depending upon different brokers.
By purchasing shares directly with company, you don't pay any fees or commissions. You just pay the actual share price that's it!
One more reason to buy Canadian Dividend paying stocks because of the favorable tax treatment by the Government. It is not taxed as much as American Stocks are.
How to Enroll in DRIPS?
In order to be enrolled in drips, all companies require that you should own single share. There are two ways to buy single share, either you deposit money into brokerage account and buy your single share, for each trading you make, your broker will charge you an average $29/per trade.
The First Method:
You can buy your first share by depositing money into brokerage account and buy your single share. For each trading you make, your broker will charge you an average $29/per trade which means whenever you buy or sell, you will have to pay $29/trade.
When you buy your first share with brokers, you should keep this in mind that those shares are registered on a street name. A Street name is simply the name of the broker or brokerage company name, the reason that shares are kept in street name, so that your broker can sell and buy shares on your behalf, don't worry they are your shares but it's just for convenience. After buying your first share with a broker you need to transfer that share in your name to be a registered shareholder and also to be eligible for DRIP.
After the share transfer is complete, your broker will send you a certificate of a share. You then need to check which transfer agents deal with the company you buying share of , for example Computer Share (Transfer Agent ) acts as a representative of Bank of Montreal . Computer share deals with many other companies as well but if you want to be enrolled in DRIP for Bank of Montreal you need to deal with computer share (transfer agent). I will provide you a list of companies that computer share deals with.
A transfer agent is simply a third party that keep records of Bank of Montreal shareholders. After you get your certificate from your broker, you need to mail that certificate to Computer Share, before that You need to download some forms from the computer share website : www.computershare.com > Investor Centre > Investment Plans, Search the company you buying share of for example “Bank of Montreal” , download the forms, fill it out and mail it with your certificate to transfer agent.
Ok now lets look at the negative side of using this method. These brokers can be very expensive for small investors, because of their hefty fees and commissions.
Take a look at this Example:
Suppose 1 share price of Nova Scotia is $54.25.
When you buy this share it will cost you $54.25 + $29.99 (Broker’s fee) each trade you make that is (each time you BUY SHARE) + $70 (Average price charged by brokers to issue certificate) to transfer the share from street name into your name.
Total of $154 for buying your first share!!!.
This process is quick and easy but you're paying a lot
The Second Method:
The second method of buying single share is more preferred, it may take some time but it's worth it. You can buy single share from someone who already have that share that you're looking for.
The person you’re buying share from will charge you the $10 for each share you buy over the actual share price which means you can get your very first share of (Nova Scotia share price $54.25 + $10 = $64.25) only. The $10 is a courtesy fee to the seller because he/she helping you to buy single share to get into drip program.
See the difference :
Buying share from Broker cost you $154 , whereas buying share directly from someone else who already have share will cost you $64.25 a total of $89.75 difference, you can buy 1.5 shares from this money you save! . I will explain later, the method to buy your first share.
Of course while drips has advantages , it has disadvantages as well, but that disadvantage is probably an advantage.
In drip, you cannot sell your share quickly as with broker, why I called this as an advantage? Because if you are following the market conditions day by day, you may panic and decide to sell that share, if it’s doing bad, because economy conditions fluctuates on a daily basis, share prices go up , it goes down, based on that you cannot decide to sell your share. Drips are for long-term investment, it’s a road to riches but it should be done in a correct manner. Short-Term trade is a very risky and it’s not for drips. If you sell your share less than a year, you will also be taxed on Capital Gains. You need to avoid being taxed , tax will eat your investments. So if you decide to sell your share , it won’t sell instantly it will take some time to sell which is a good thing, because than you have time to reconsider.
What are Capital Gains?
If you buy a share for $50 and sell it for $55 , in less than a year , the $ 5 difference (Profit) is a Capital Gain. Long-term stocks are taxed at more favorable rate than short term stocks, but don't sell stocks only because it is qualified for long-term gains treatment, if stock is doing well and meeting your investment criteria then hold on to it.
DRIPS stand for Dividend Reinvestment Plans, where you can buy single share of a company who offer drips. The dividends you earn are reinvested to buy more shares and therefore you get higher returns. When you are starting in a drip program, it is more preferred to buy share from someone who already have a share to avoid paying broker's commissions and fees. To be enrolled in a drips program, you need to have a single share of that company, after you receive your share certificate you need to download forms from Transfer Agents website and mail them back to be enrolled in a DRIP program. If you sell your share less than a year then you will be taxed on capital gains. Canadian Dividends received favorable tax treatment from the government , so it is advisable if you are a starter only keep your portfolio to Canadian Dividend paying stocks.
The lazy investor is a guide to drip investing.