DRIPS - dividend re-investment plans

For two good reasons which I'll get to in a minute, I do not use them, but a case can be made, in some circumstances, for dividend investment plans. It's a personal decision. Many are attracted to DRIPs, for instance, because it saves on brokerage commissions. As I trade infrequently and on the internet at minimal cost, this argument does not sway me. Compared to the annual MER on mutual funds, commissions on individual stock buy/sell orders are a pittance.

Here is the bottom line on DRIPs. It does not really matter if you drip or spend the dividend. The real return comes from growing yield, the cash flow your stock provides over the long run. You buy a quality dividend growth stock and you hold and hold. Dividend growth drives returns.

  • Drips do 'kind of' force you to think and act long term. That's good.

The Power of Dividends Many investors dismiss dividends as insignificant. Dividends are not extraneous in the long term. Here is an example of the power of dividends over the long term with data from Ibbotson Associates, a Chicago research firm. A dollar invested in the S&P 500 at the end of 1925 grew to $96.45. However, if all dividends were reinvested, the $1 would grow to $2,350. “The remaining $2,253.55, or 96%, of the gain came from reinvesting the dividends and capital gains on the shares bought with those reinvested dividends.” This example is compelling: young people should consider DRIPs or find an alternative method of compounding dividends. If your income is less than about $60,000, your income tax rate on Canadian dividends is only 7%.

Why I do not use DRIPS:

1. I am retired and use dividends to supplement my other income. Dividends accumulate in my discount brokerage account: periodically I make a transfer. This approach also gives me the option of easily re-investing the dividends in another company when and if its price is right.

2. This aspect of the price being right is the main reason I don't use DRIPs. I use the Connolly Report list (with yield as my yardstick) to determine when a common stock is value priced. When the stock I'm waiting for is value priced, I buy. With a DRIP, the shares get purchased at various prices. It might be lower, but chances are, the price will be higher. For example, We bought our Fortis a few years ago at $13. I would not want to buy more at the current price. It's overvalued.

drips.txt · Last modified: 2015/09/11 18:13 by tom
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