Buy dividend stocks by tapping into DRIPs

A dividend reinvestment plan is the most efficient way there is of adding to your shareholdings of top Canadian dividend paying stocks. Investor’s Digest of Canada regularly monitors 100 Canadian companies and income trusts offering DRIPs and lets you know such essential details as the transfer agent who administers the plan, payment frequency, price discount and  additional cash investment option.

If you own shares of a blue-chip, top dividend paying stock, you may be able to buy more without paying a transaction fee.

dividend_reinvestments-planA dividend reinvestment plan, or DRIP, is a program offered by some companies and income trusts that allows shareholders/unitholders to reinvest their dividends/distributions in additional shares/units of that company.

Since a company must pay dividends to offer a DRIP, our list leans toward established blue chip stocks.

To join a DRIP, you must be a registered shareholder of the issuer. Most issuers allow shareholders to participate in the program with only one share. But some require more.

Once registered, you’ll then start receiving quarterly receipts or transaction-activity reports. But be prepared. The paperwork associated with a large portfolio of DRIPs can be burdensome.

One criticism is that DRIPs create an administrative nightmare. After all, every time a company reinvests your dividends or cash, your adjusted cost base changes. It’s important to keep track of your adjusted cost base for tax purposes.

A second criticism is that DRIPs lead you to pay tax on income you don’t receive. But if DRIPs suit you, the benefits sure beat the costs. Investment guru Peter Lynch says you are better off watching your DRIPs, than in following the market’s every twist and turn.

DRIPs encourage investors to follow a simple but effective investment technique — dollar cost averaging. By buying shares on a regular basis, you’ll be spared the nuisance of buying them when their prices have gone through the roof.

You’ll also end up getting your shares at below-average cost. As well, you will have profited from volatile markets.

The biggest advantage of DRIPs is that no other commissions need be paid. The longer they’re held, the more you benefit.

Moreover, by taking advantage of a dividend reinvestment plan, you’re spared the customary spread between the “bid” and the “ask” price for a stock.

DRIPs also provide you with the benefit of compounding. As your reinvested dividends buy more shares, your dividends get bigger over time.

Other advantages include putting your dividends to work immediately. This beats letting them sit in your brokerage account until you have enough cash to invest.

As well, DRIPs set up ‘forced’ savings plans. After all, you can’t spend dividends you don’t receive.

Finally, you benefit from the dividend tax credit on Canadian stocks and pay tax on just half of your capital gains.

 

Investor’s Digest of Canada, MPL Communications Inc.
133 Richmond St. W., Toronto, On, M5H 3M8, 1-800-804-8846