Friday, 26 February 2016

Using Dividend Reinvestment Plans

    Using a Dividend Re-Investment Plan is an easy method of increasing ones position within a company over time, and a passive method of putting dividend payouts to work. DRIP's work by buying a new full share, or multiple shares of a company and/or fractional shares through the stocks dividend payments. 

    So if you are the kind of person who does not want to, or have the time to actively reinvest your dividend payouts then using a DRIP to slowly add to your positions over time may be a great way to increase your passive income without doing any extra work. Utilizing DRIP's especially helps to keep cash from sitting in your account and not working for you!

    There are technically two different kinds of DRIPs to enroll in, and the type depends on where and how you keep your shares.

1) A DRIP is the agreement between the shareholder and issuing company of the shares to pay out dividends in shares. For a true DRIP, one must first register their shares and obtain a certificate of ownership, from there any and all dividends will be used to purchase full and fractional shares of the company. Doing so makes the holder of the stocks a registered shareholder, rather than a beneficial shareholder who holds the stocks through a brokerage account or investment dealer. Getting certified requires contacting the issuing companies transfer agent which maintains the records and dividend payment, and there is usually a fee involved. Depending on the transfer agents plan, you will be either mailed a physical hard copy certificate of your share ownership, or as is becoming more common the records will be kept in electronic form.

    Once everything is filled in, registered and completed, when the next dividend payment comes you will now receive new full and fractional shares in place of cash. And the following dividend payment you will receive even more as your new shares get put to work! That is assuming of course the share price is the same; the downside of DRIPs is that you cannot control or 'time' when to put your dividends to work, the upside however is that you are automatically putting your dividends to use with no effort on your part.

2) Synthetic Drips work in a similar manner to the previously described DRIP, and are administered through your brokerage who hold your stocks for you in your name. Because the brokerage is holding the stocks in your name, rather than you actually being the registered certificate holder, there are two notable differences with using SDRIP over a DRIP.

    - The first difference is that you will only receive full shares, with any remaining dividends deposited as cash. For example if shares of company X trade at $10, and your dividend payout was $25, you would get 2 shares and $5 added to your account.

- The second difference, as you may have noticed from the example is that shares from a SDRIP are bought on the day that the dividends are received, at market price. They do not get the benefit of the companies DRIP plan discounts, since the brokerage is paying you the shares instead of the issuing company.

    Participating in a SDRIP still gives you the benefits of automating and getting to grow your stock positions with minimal effort. Also, since this DRIP is administered through the Brokerage, you are able to happily DRIP away even when the stocks company does not have a formal dividend reinvestment plan.

    Either from of DRIP is easy to use within a registered savings account, simply DRIP and forget. However, when used in a non-registered account you will need to keep track of your adjusted cost basis of your positions, because if/when you sell your shares you will have multiple shares bought at different prices for capital gains or losses when filing your income tax.

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