DRIPs (Dividend Re-Investment Plans) and cash option plans let individual investors build their wealth. That’s thanks to the dozen benefits that we outline below.
Dividend Re-Investment Plans (DRIPs) can build your wealth. You can instruct companies with DRIPs to reinvest your dividends into new shares. You can build wealth even faster when DRIPs offer cash option plans. That’s where you write a cheque to buy more shares. DRIPs offer you a dozen benefits.
One is that DRIPs let you buy stocks gradually. Having modest dividends automatically reinvested is easier on the nerves than investing big sums all at once–particularly during stock market setbacks.
Second, DRIPs let you profit from today’s stock market volatility. You profit from what’s known as ‘dollar cost averaging’: that is, regularly invest fixed sums and you buy more shares when prices are lower and fewer shares when prices are higher. As a result, you buy your shares at below-average prices.
Eliminate or minimize trading costs
Third, DRIPs in Canada cut brokerage fees. Such is not always the case with U.S. DRIPs.
Fourth, you avoid bid-ask spreads (paying the higher ‘ask’ price and taking the lower ‘bid’ price).
Fifth, cash option plans help you resist the risky and futile strategy of ‘market timing’ (trying to buy at the bottom and sell at the top—at the ‘right time’).
Sixth, most companies and real estate investment trusts with DRIPs are of high quality. In fact, we rate 60 of 72 as either ‘Very Conservative’ or ‘Conservative’. And 43 are Key stocks.
Seventh, dividend-payers tend to be well-managed corporations that will keep you out of scams. And rising dividends improve your chances of making share price gains as well as rising income. As aging investors seek income, they’re likely to bid up the prices of stocks that raise their dividends each year.
The magic of compounding
Eighth, DRIPs give you compounding. As your reinvested dividends buy more shares, your dividends get bigger. And all of your dividends work for you. One study found that a dollar invested in the U.S. stock market from 1926 to the millennium grew to $105.96 from capital gains. Reinvest the dividends, however, and that dollar grew to $2,591.79.
Ninth, DRIPs put your dividends to work immediately. This beats letting them sit idly in your account.
Tenth, DRIPs amount to ‘forced’ savings plans: you can’t spend dividends you don’t receive.
Eleventh, the dividend tax credit on Canadian stocks reduces the tax department’s bite. But interest income is fully taxed outside of registered accounts.
A twelfth benefit is that 33 Canadian investments we monitor will reinvest your dividends into new shares at a discount to their market prices. That way, you profit right from the start, of course.
The Investment Reporter, MPL Communications Inc.
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The Investment Reporter •12/21/15 •