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How To Profit From Dividend Reinvestment Plans
La Presse
Published Wednesday, August 14, 2013
A simple way to make money on the stock market is to participate in dividend reinvestment plans (DRIP) developed by most Canadian and American companies who have chosen to pay a dividend to shareholders. Instead of receiving the dividend in cash, the shareholder asks the company or its broker to receive the dividend in the form of shares..

Seen from this angle, the DRIP becomes a kind of forced savings plan which benefits the investor thanks to compound returns of the dividend.

Suppose an investor has 20 shares of XYZ Corporation at a price of $20 per share, each paying an annual dividend of $1, for an annual dividend yield of 5%. If the investor enrolls in the DRIP, its performance is at 5.25% after one year, and then at 5.5% after two years, without having done anything.

Another advantage is that fees or commissions are not usually charged when shares are purchased through dividend reinvestment. As a bonus, the company often offers discounts ranging from 2 to 5% on the purchase price of its shares in the DRIP.

According to information reported by the Canadian DRIP Primer website, the company Genivar, for example, gives a 5% discount and Laurentian Bank, a 2% discount.

DRIP Manual

The astute stock market investor cannot ignore these benefits, but how can he take advantage of the DRIP? First, he can contact his favorite discount broker. The investor tells the broker that he wishes to participate in the company´┐Żs dividend reinvestment program. The broker will respond to the request provided that the dividend is large enough to acquire a whole number of shares. This is not always the case with companies like Google and Apple, whose share price exceeds $100.

Another possibility is to ask his broker to issue at least one share in his name. Most of the DRIPs require holding one share for the investor to be eligible. There will be a fee of $50 for issuing the share certificate, but thereafter, the investor is enrolled in the DRIP directly with the transfer agent, such as Computershare. The process is cumbersome, but once the paperwork is completed, the investor may exchange the dividend for a fractional share while taking advantage of the discount offered by the issuer, if applicable.

There is an alternative. A discount broker like no other, Canadian ShareOwner Investments, of Toronto, deals with investors on equal footing, regardless of the size of their portfolio. It offers dividend reinvestment in new shares, up to four decimal places if the dividend received is insufficient to buy a whole share.

'In short, we suggest our clients consider companies which have been in the stock market for a long time and which have a solid history of growth in revenues, profits and dividends", said Bruce Seago, CEO of the brokerage, in a telephone interview.

In addition, investors can periodically invest a fixed sum in one stock or a portfolio of stocks, as done in a mutual fund. For example, you might invest $500 monthly in 10 different stocks, among a choice of approximately 450 Canadian and U.S. securities. The cost? No account opening, account maintenance or inactivity fees. To purchase or sell a single security, the commission is $ 9.95. For combined share purchases of five companies or more, it's $40.

Canadian ShareOwner Investments is a member of the Canadian Investor Protection Fund, which protects customers up to $1 million in the event of bankruptcy of the broker, and the Investment Industry Regulatory Organization of Canada.

The article was translated from French and was originally published

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