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DRIPs with SPPs—An IntroductionDo you want a low-cost and hassle-free method for setting up a "blue-chip" portfolio of common stocks? If so, consider dividend reinvestment plans (DRIPs) and share purchase plans (SPPs).Using these plans, you can purchase common stocks with high yield and capital gains potential, and reduce the costs associated with the share purchases at the same time. And DRIPs allow dividends to be reinvested automatically. You receive no dividend cheques, so you don't have to worry about spending your dividend money or forgetting to reinvest it. Following this strategy, your profits will be compounded. Drip AdvantagesIn Canada, 22 or so blue-chip companies offer dividend reinvestment plans on their common stocks.Some firms also offer up to a five per cent discount from the market price on shares you buy through your DRIP and, unlike dealing with a stockbroker, your purchase will not be subject to a commission. Some also welcome additional cash payments for share purchase (SPPs). If you want to buy more shares—for example, when the stock price is low or when you have some extra cash to invest—you may be able to do so directly through the transfer agent. These cash investments can be made with no extra commissions. Your share price is usually based on the average price in the last five trading days prior to a dividend payment. There is no discount for shares purchased through cash investment plans. (Time your cash payments so that you do not needlessly lose income potential by having your money sitting unprofitably with the company's transfer agent until your shares are purchased.) One of the main advantages of DRIPs is that you do not have to worry about the size of your share purchase. In general, if you buy from a broker, you pay higher prices or commissions if you don't buy a "board lot" (multiples of 100 shares). DRIPs let you buy "odd lots", even fractions of shares, with your dividends. How to Get StartedTo benefit from a DRIP, you must first be a shareholder. In Canada, this means that you must initially buy at least one share from a broker, or have someone transfer one share to your name. You do not qualify if the share is registered through a brokerage company.It is prudent to shop around to find the lowest commission and registration cost. Not all brokerage fees are the same. You can spread the fees out on a per share basis if you purchase more than one share (or stock). Of course, you can generally get a better price by buying a board lot rather than an odd lot. Don't forget to investigate discount and online brokers. In most cases, your cost will be the price of the share, a transaction fee (around $25) and a fee to register the share (about $30). You may be fortunate enough to have a friend who owns a share of a qualifying DRIP company in which you wish to invest. If the friend is agreeable, he or she can deregister one share and reregister it in your name through the transfer agent of the company issuing the share. The broker will charge a fee (about $25), but there is no cost when the transfer agent makes the transaction. How it WorksOnce you have a stock (certificate) registered in your name, you'll probably be sent the company's DRIP and SPP authorization forms—if not, write and request them. The forms take only a couple of minutes to complete and return. You are immediately eligible to participate in the DRIP and SPP (if offered).Investment dates are usually monthly or quarterly. Shortly after the investment date, you receive your transaction report. You may use this form if you want to withdraw from the plan at any time. By participating in DRIPs, you are effectively "dollar cost averaging". This means investing a fixed number of dollars on a regular basis regardless of how may shares those dollars buy. You buy fewer shares when the price is high and more shares when the price is low. This method eliminates the guesswork in deciding when is the best time to buy. The FactsThere is only one way to participate in the dividend reinvestment discount with some companies offering a discount to have dividends reinvested at 95% of the market price. You must have your shares registered in your own name. No brokerage or any group, offers you this arrangement along with the SPP.How do you have shares registered in your name? 1. If you hold qualifying stocks (see chart) in "street name", you'll have to reregister the stocks in your own name. Ask your broker to do so. Probably, you'll face resistance as he will no longer profit from your future purchases. (There likely will be a registration fee charged by the broker of $25 to $50 .) As soon as the registration has been changed, contact the company or company's trustee to request the DRIP and SPP enrollment forms. These forms take less than a minute to complete. After the first reinvestment of dividends, you'll receive your first DRIP statement. Then you can proceed to make SPP contributions. 2. Any other shareowner may deregister one (or more) or his shares and reregister it in your name. Once completed request the DRIP and SPP enrollment forms. There is no cost to the shareowner for deregistering this share. A single certificate for this share will be issued to you, the new owner. Here again, the trustee does not charge for this service. Whenever registering a share, the new owner(s) must provide name, address, Social Insurance Number (SIN) and telephone number (for convenience, if needed). The new owner may pay the market price of the stock at the time of the transaction to the previous owner. 3. The final method for completing this process is the obvious one. Buy your share(s) through a brokerage and have them registered in your own name. This method may be the quickest method to get started. You will pay the minimum
commission and a service fee to have the shares registered in your name. You
need to shop around for the lowest fees—usually about a $25 commission and $25
for registration. However, these fees often change.
Chuck explains quite clearly how you can buy over 270 U.S. companies' shares directly without using a stock broker. Step-by-step instructions are provided along with all the contact information for each public company and its trustee. Both DRIPs and OCPs are obtainable through many of these companies. There is no broker commission to pay. You can purchase this report with cheques drawn on a U.S. bank or credit cards through (888) 233-5922 (mention you are a MoneySaver member for the discount) or www.dripinvestor.com.
Full details on the Member Benefits page. 5. MoneySaver members may also buy, sell or swap DRIP shares at no commission through our members' Message Board. 6. For further information consult all the known DRIP-related sites on our Recommended Sites page. For MoneySaver members only, see the DRIP Resources page. Long-term ProspectsDRIPs can be used effectively with even small amounts of money over periods of years. Many of the Canadian stocks offering DRIPs have performed very well over the years—but remember that past performance is no guarantee of future gains. Not all DRIP stocks are equally appealing. An investor should select stocks with a steady or rising dividend.The dividends from high-quality stocks tend to increase. DRIPs can provide the investor with an important edge for long-term income purposes. Choose your stocks wisely to hedge against inflation with a diversified portfolio of high quality stocks. Aim for stocks in the finance, manufacturing, resources, utilities and consumer sectors. This diversification will help eliminate the emotional element and let you ride out the ups and downs of the stock market. Tax ImplicationsDividends from Canadian sources receive a more favourable tax treatment than interest at all income levels. Due to the dividend tax credit, investors must receive much more in interest to net the same after-tax income. Rates do vary depending on your own marginal tax rate. Naturally, your dividend income must be reported as taxable income when issued, even if you reinvest it via a DRIP. The capital gains advantage on stocks is also clearly evident as it is only taxable when you sell.More InformationMany investors get burned because they buy stocks at the top and sell at the bottom. With DRIPs and cash investment options, you have a fairly easy method for controlling your investment dollars.Canadian MoneySaver provides ongoing data on these Canadian DRIPs and SPPs, plus very profitable portfolios presented for your use by our contributing editors. MoneySaver has arranged through "Member Benefits" the option of purchasing hundreds of U.S. stocks directly—without using a broker. These U.S. companies have DRIPs and OCPs (an American term for SPPs). |
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A U.S. service, Moneypaper, which offers MoneySaver
members the opportunity to purchase hundreds of U.S. companies at
the lowest brokerage rate available to Canadians. 
