Long-term investors can grow their holdings with DRIPs, investment advisers say
By: Craig Wong, The Canadian Press
OTTAWA – Dividend reinvestment plans can offer long-term investors a cost-effective and regular way to grow holdings in their favourite companies, as long as they don’t need the cash, experts say.
Kathryn Del Greco, a vice-president and investment adviser at TD Wealth, said if you are a young investor with a long-term horizon, so-called DRIPs can be appealing.
“It really does take the emotion out of investing,” she said.
“Every single quarter you are making a new investment directly into that company, whether the markets are high or whether the markets are low, and its an automatic strategy that is thought out in advance.”
With a dividend reinvestment plan, shareholders receive shares of the company paying the dividend instead of cash, with the number of shares sometimes calculated at a slight discount to the prevailing market price, giving investors an extra incentive to enrol in a plan.
If a dividend payment isn’t enough to buy a whole share, plans generally pay you a fraction of a share, allowing you to put even small payments to work.
They also have the added advantage of helping shareholders grow their holdings without commissions, service charges or brokerage fees.
But they aren’t for everyone.
Del Greco says if you need the cash from the dividends to pay your bills or fund your regular spending, a reinvestment plan isn’t for you.
Or if you want to use the cash generated from dividends to diversify your portfolio into other companies, you may not want to consider such a program.
“You need to be clear that you are not in need of that regular quarterly cash flow coming to you,” she said.
Many of Canada’s most popular dividend payers offer dividend reinvestment plans for shareholders.
All of Canada’s big banks offer the opportunity to shareholders to receive shares instead of cash, as well as many of the widely held utility stocks and the telecommunications companies.
BCE, one of the most widely held stocks by retail investors in Canada, also allows shareholders enrolled in their plan to invest up to an additional $20,000 a year in the company through optional cash payments.
Del Greco said another benefit for those enrolled in a reinvestment plan is that they can benefit from dollar-cost averaging.
That means if the price of the stock falls, but the dividend remains the same, you end up with more shares. The reverse also is true. If the price of the stock spikes higher, but the dividend remains the same, you’ll receive fewer shares.
Dividend reinvestment plans also benefit from compounding, as the shares you receive will pay dividends that will grow your holdings.
Ermes Monaco, a portfolio manager with HollisWealth, agreed that, for long-term investors, a dividend reinvestment plan may make sense but cautioned that you can’t just enrol and leave it on autopilot.
Like any investment decision, it needs to become part of your regular review of your financial plan.
“You have to keep an eye on what the percentage that particular investment is in your portfolio and how much dividend reinvestment is contributing to it,” he said.
Monaco also noted that participation in dividend reinvestment plans will keep you fully invested in the market, a decision that needs to be made within the context of your overall strategy.
Ordinarily the cash paid by dividends would accumulate in your account, adding to your buffer against volatility in the market. However, if your dividends are reinvested, you will remain fully invested.
“There are times that you want to hold back a little bit of cash,” he said.
Investors who set up dividend reinvestment plans for investments not held in tax-sheltered accounts, such as an RRSP or a Tax Free Savings Account, also need to remember they will be taxed on the dividends received.
Investors in those cases could face a tax bill when they file their return.