Friday, February 17, 2006

Starting to DRIP

There is, in the heart and mind of certain investors, a watershed moment when the DRIP concept crystallizes and becomes an unquestionable thing of beauty. More than just another investment method, DRIPs represent, for these investors, a grass-roots triumph of the small investor over the entire fee-charging and sometimes exploitive personal finance arena and an opportunity to mathematically 'beat the system' on a number of levels, following the spirit and tradition of successful investors and prolific authors like Robert Gibb, Norm Rothery, and Thomas Carroll, and incorporating practices well-espoused by the likes of Stephen Jarislowsky and others.

For those who have not embraced this approach, DRIPs smack of complexity and seem slow, awkward to manage and a potential paperwork and tax burden. Compared to other approaches there are few books written on the subject, few, if any, flashy success stories and they are, by definition, not widely promoted by the mainstream investment community.

In short, DRIP investing generates very polar types of emotional appeal. Most people I've spoken with identify clearly with one of the above descriptions, there seem to be few fence-sitters, and by far the majority, not unpredictably, appears to be in the latter camp.

For this reason its not surprising that Robert Gibb consistently greets newcomers to the forums he moderates on dripinvesting.org with a half-joking "welcome to the Cult!".

As I openly admit I have had my own 'DRIP epiphany' I wanted to offer something of a rolling FAQ that not only outlines the basic how-to's I'm learning first hand, but also dispels some myths and outlines resources that I have found to be very beneficial.

So, as I mail in my first share transfer form this morning - I am now the proud owner of 1 (one) share of BCE - this seems like a good time to start.

1. What is a DRIP?
A DRIP, or dividend reinvestment plan allows shareholders of record (i.e. those in whose names shares are registered - usually excluding those who hold shares in the street name through a brokerage account) to have dividends automatically reinvested to buy additional shares, even to fractional amounts. Most also include an optional cash purchase (OCP) , allowing additional shares to be purchased at periodic intervals. In both cases, there are usually no fees whatsoever, even for the sale of shares held in the plan or the transfer of shares out of the plan.

2. Who manages the programs?
DRIPs are managed by transfer agents - third parties responsible to implement the plan as dictated by the plan terms set out by the sponsoring issuer. In Canada, the two big transfer agents are CIBC Mellon and Computershare.

3. How do I start investing with a DRIP?
First, have a look at the list of US and Canadian companies with DRIPs. For the companies that interest you, review the terms of the DRIP plan (usually on the company's web site) - minimum/maximum cash purchase amounts, discounts that may apply, number of shares needed to start, etc.

Then, get your first share.

4. How do I get my first share?
There are two ways to do this:

i. Buy a share through a discount broker and request it be transferred into your name.
While relatively quick, this will be costly as you will need to pay for both the purchase and the share transfer – sort of defeats the purpose.

ii. Arrange to buy one from an existing shareholder.
The ‘share exchange’ board at dripinvesting.org has a great community that has proven very willing to help newcomers start up. If anyone is looking to acquire a share I suggest you start there. Canadian Moneysaver also has a DRIP forum.

5. What do you do once you get your first share?
Contact the transfer agent to confirm requirements. In the case of BCE, I had to mail in the transfer form first, then mail in the DRIP enrollment.

Some resources:
DripInvesting.org (check out the articles and the discussion boards)
Canadian Issuers with DRIPs (and their plan specifications) via Computershare and CIBC Mellon

1 Comments:

Anonymous Anonymous said...

Just an addendum - some brokerage houses have a DRIP feature, but only pay out in full shares only, any fractionals get paid out in straight cash.

3/07/2006 12:18 AM  

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Disclaimer: These articles are for information only, and are not to be construed as financial advice, legal advice, or a solicitation to buy or sell securities.