A dividend reinvestment plan (sometimes referred to as a DRIP) is a program that allows a shareholder to reinvest their dividends into more shares (whole or even fractional) of the stock instead of receiving cash.
It’s a low-cost option for anyone looking to automatically reinvest their dividends instead of receiving the cash.
There are 2 types of DRIPs: a program offered directly by a company that pays dividends or one offered by a broker. When used over the long term, both types offer potentially attractive returns through automatic reinvesting while also keeping costs low.
What’s a dividend?
A dividend is a payment made to shareholders of a stock that comes from the company’s earnings. Sometimes they’re paid monthly, although most are paid quarterly (4 times per year) and can fluctuate based on various factors such as company earnings and the general economy.
Companies that consistently raise their dividends annually are popular with dividend investors, who tend to focus most of their investments on buying shares of companies that have a long and proven history of dividend increases.
Want to learn more about dividend stocks? Check out some of the best in Canada here.
What’s dividend reinvestment?
When a shareholder is paid a dividend, they can either receive the amount in cash or reinvest it through a dividend reinvestment program.
Dividend reinvestment plans (DRIPs) are an attractive alternative for anyone who is looking to grow their investment long term and doesn’t necessarily need the cash in the near future. Dividend reinvestment plans are usually either free to set up or only cost a small fee.
Some investors prefer them because it allows the investment to grow in the long term while minimizing costs. Rather than receiving a cash dividend and then paying commissions to purchase more shares, the investor can automatically reinvest and acquire more shares.
They allow investors to dollar-cost average by automatically reinvesting each month/quarter and it also allows investors to passively grow their investments. Once a DRIP is set up, there’s nothing else the investor needs to do aside from continuing to monitor their investments.
How to get started earning dividends
There are some funds and ETFs (exchange traded funds) that pay dividends, but the most common and straightforward way to earn dividends is to purchase a stock of a company that pays dividends.
To get started earning dividends, you’ll want to set up an investment account using an online broker. Big banks offer online trading for investors, with one of your least expensive options being CIBC Investor’s Edge.
There are other low cost brokers that aren’t directly affiliated with the big banks, such as Questrade. Low cost brokers are popular because they tend to have lower account fees and commission costs that are charged to the account each time you make a trade.
You can learn more about both options here:
This online investment brokerage is owned and run by CIBC, and is targeted towards people who are interested in managing their own investments, learning about how to manage their own investments, and people who do investment management for a living. With relatively low fees for trades, and discounts for students and active traders, this is a service worth looking into.
- Get 100 free online equity trades with code EDGE100
- No minimum investment required
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- Seems to be designed for regular people, not just the ultra rich
- Per transaction fees can add up quickly
- Ages 18 - 24 trade for free
- Free investment research tools
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- TFSA
- RRSP
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- Stocks
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Questrade is one of Canada's top online investment platforms. With very low fees, including no-fee ETF trading, commission-free stock trades, and plenty of investment types, Questrade just about covers it all.
- Total transparency with fees
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$25 GeniusCash + $50 bonus for funding a new account, and $0 commissions on stocks & ETFs- Excellent array of investing and trading tools
- Trade ETFs for $0
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$25 GeniusCash + $50 bonus for funding a new account, and $0 commissions on stocks & ETFsWhat are dividend reinvestment plans?
Dividend reinvestment plans are typically offered in 2 ways:
- directly through a company that offers a DRIP to shareholders, or
- through a broker that reinvests the dividends on your behalf.
A DRIP offered by a company takes a little more time and effort to set up, but some companies offer a small discount off the current share price when the dividends are reinvested.
With a broker, the broker buys the shares on your behalf at the current share price automatically. The DRIPS offered by a broker are more common because they can be applied to almost any share (or ETF), but not all companies offer a DRIP directly.
If you’re curious about a specific company, you can check the investor section of their website to see if they offer one for shareholders. Some brokers such as RBC Direct Investing have an extensive list of stocks that are available to DRIP, for example this list from RBC Direct Investing.
How do dividend reinvestment plans work?
Once you have an investment account setup and you purchase shares of a company that pays dividends, there’s nothing you’ll need to do to receive the dividends – as the cash will be paid automatically into the investment account.
To set up a DRIP and have your dividends automatically reinvested, you’ll need to fill out a DRIP form with your broker. The DRIP enrolment is usually free and there are no transaction (commission) costs when the dividends get reinvested.
When the dividends are paid, the broker will reinvest the amount for you by automatically purchasing more shares at the current market price. If you sell your shares in the company, the DRIP gets cancelled automatically.
Robo advisors and DRIP
Robo advisors are starting to offer DRIP options as well, with a main example being Wealthsimple.
Since your Wealthsimple Invest portfolio is based on ETFs, they’ll automatically reinvest your dividends in ETFs that are the most underweight according to the investment plan you have with them.
For anyone looking to put their investments on autopilot with a robo advisor, this is it. The algorithm continually monitors the weighting of your portfolio and reinvests accordingly using any dividends received.
You can learn more about Wealthsimple Invest here:
Wealthsimple managed investing is a robo advising investment platform from one of Canada's favourite online brokerages, Wealthsimple. It offers a hands-off investment experience with no paperwork and no account minimums – a huge draw for anyone who's new to the world of investing or simply trying to make smart choices with minimal funds.
- Easy to understand fees
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- Grow into Wealthsimple Premium
- Socially responsible and Halal investment options available
- Higher account management fees
- Limited tools
- Talking to a human can be tricky
- Provides socially responsible and Halal investment options
- Can connect your account to Mint for easy budgeting
- Get a dedicated team of advisors if you have more than $500,000 in assets
- RRSP
- TFSA
- Personal
- RESP
- RRIF
- LIRA
- Joint
- Business
- FHSA
The pros and cons of dividend reinvestment plans
There are several pros and cons of a dividend reinvestment plan, with the biggest benefit being that a DRIP is automatic and makes growing your investment relatively easy.
| Dividend reinvestment plans | |
|---|---|
| Pros | * Automatic and no need to continually rebalance or monitor * Continual reinvestment allows your investment to grow long term * Most are relatively easy to setup and fees are usually low (ie. no commissions to constantly buy new shares) * The nature of a DRIP means emotions are taken out of your investments and they are on “auto pilot” |
| Cons | * Since you aren’t receiving cash, you don’t have the flexibility that cash offers * Tracking your investment cost in a non-registered account can be tricky * You can’t control the timing of the reinvestment – it happens automatically when the dividends are paid |
4 pros of dividend reinvestment plans
A DRIP means you can keep costs low, put your investments on autopilot and take advantage of compound growth over a long period of time.
1. Automatic rebalancing
Since DRIPs are automatic, the investment is able to grow on its own without the need to continually monitor, fund, and rebalance.
2. Compound growth
By leaving your money to be continually reinvested, you’re taking advantage of compound growth, which can be quite dramatic over long periods of time.
3. Easy to set up
Most DRIPs are easy to set up – and once they get set up, there’s nothing else you need to do.
Plus costs are kept low since you don’t have to incur more commission costs by buying more shares with the cash you receive from your investments. This is done automatically and for free.
4. No emotional investing
The automatic nature of a DRIP means you won’t be tempted to buy more (or less) based on emotions generated from headlines. You don’t have to do anything – just sit back and watch your investments grow.
3 cons of dividend reinvestment plans
A DRIP offers less flexibility since you aren’t actually receiving cash dividends, tracking the cost can be complicated, and a DRIP means you can’t control the timing of when the reinvestment occurs.
1. Less flexibility
DRIPs mean your money is reinvested as shares instead of coming to you in the form of cash.
That means that if you needed that cash to pay for unexpected costs, it won’t be available and you’ll have to liquidate first.
2. Difficulty in tracking your investment costs
For anyone looking to set up a DRIP in a non-registered account, tracking the cost of the investment can be tricky and further complicated if there’s foreign exchange involved.
This isn’t an issue for anyone investing in a registered account such as a TFSA or RRSP.
3. Timing can’t be controlled
In a DRIP, the funds get reinvested at set intervals (such as quarterly) and can’t be timed when a stock is particularly low.
What about you?
A DRIP is an effective way to grow your investments over the long term – and it means you can have your investments do all the work themselves without having to actually do anything, while also keeping costs low.
When used correctly a DRIP can be a powerful tool to build wealth and save for retirement.
Are you interested in DRIPs?
Let us know in the comments below.
FAQ
What are dividends?
Dividends are payments made to shareholders from a company’s earnings. They’re usually paid out quarterly (4 times per year) and can go up and down based on several factors, such as the economic health of the company and the overall economy.
What is a dividend reinvestment plan?
A dividend reinvestment plan (DRIP) is a plan offered either directly from a company that has publicly traded shares that pay dividends or through a broker. It allows a shareholder to automatically reinvest their dividend into more shares of the company instead of receiving cash.
Are dividend reinvestment plans good?
Dividend reinvestment plans are a nice way to put investments on autopilot, taking the emotions out of your investment decisions, while allowing them to compound over the long term and keep costs low. You can see the pros and cons here.
Who offers dividend reinvestment plans?
Dividend reinvestment plans are either offered directly through a company that has publicly traded shares that pay dividends (an example is Fortis) or offered by a broker. A DRIP offered by a broker, for example with Questrade, is more common and relatively easy to set up. You can learn more here.
Do I need to pay dividend reinvestment tax?
Whether you pay tax on your dividend reinvestment depends on what account you’re using. If you’re using a registered account (such as an RRSP), there are no tax implications until the funds are withdrawn from the account. For a non-registered account you would need to track each reinvestment as it would affect the adjusted cost base (ACB) when the shares are sold.
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