We outline a dozen advantages you can get from dividend reinvestment plans, or DRIPs, and cash option plans. So, while enrolling in DRIPs involves a bit of paperwork, it’s a time well spent. Here are the four steps for enrolling in a DRIP.
Do you need a brokerage account? Not if you buy shares directly from 300 or so U.S. companies, including some of our U.S. Key stocks. By contrast, you’ll need a broker or a stock-holding friend or relative to buy shares in Canadian companies that offer DRIPs.
Buy shares through your broker. If you want to buy one or just a few shares, make sure that the company has a cash option plan. Later on, you can write a cheque and buy more shares. When companies lack cash option plans, it’s best to initially buy more shares. If you buy just a few, it’ll take many years for your reinvested dividends to buy another share. Canadian Key stocks with no cash option plans include Andrew Peller Ltd., Barrick Gold, Canadian Tire, Cenovus Energy, Corus Entertainment, Goeasy Ltd., Royal Bank of Canada, Saputo Inc., Shaw Communications, Thomson Reuters and Toronto-Dominion Bank.
Have your broker register the share certificate in your name. You need to be a registered shareholder to make use of a DRIP. Most full-service brokers will register shares in your name at no extra cost, though they’re unlikely to tell you about DRIPs. Discount brokers, by contrast, often charge for each extra service. To register the shares in a child’s name, ask your broker about opening a trust account. The waiting period to receive a certificate is usually two weeks. Keep certificates in your safe-deposit box.
Always keep on top of your record keeping
When you receive the stock certificate, call the company or its transfer agent and ask for a DRIP registration form. We’ve listed here the telephone numbers in our DRIP Planning Guide. When you complete the registration form and return it, much of your initial work is done. You’ll receive a transaction summary after each dividend is reinvested. You’ll also get a year-end report describing all purchases made during the year, both cash investments and dividend reinvestments, along with your yearly T5 Supplementary tax receipt. Save these records. You’ll need them to figure out your gains or losses.
You can ask for share certificates from the plan. Or, should you require money from the plan, you may withdraw all or part of your shares at any time.
It takes more than a DRIP to make a stock suitable for your portfolio, of course. The best choices are high-quality companies that pay you steadily-growing dividends. Stocks in cyclical industries may reduce or eliminate your dividends in difficult times. When dividends are reduced, so is the rate at which you accumulate new shares.
This is an edited version of an article that was originally published for subscribers in the June 24, 2022, issue of The Investment Reporter. You can profit from the award-winning advice subscribers receive regularly in The Investment Reporter.
The Investment Reporter, MPL Communications Inc.
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