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What is DRIP?

Emily 0

DRIP – Dividend Reinvestment Plan: My Baby Went from 3 Month Clothing to 12 Month Clothing

In a previous post I explained what dividends are. The Dividend Reinvestment Plan (DRIP) is a great way to use those dividends to continue growing your investment in the company. Before you know it, your investment will have increased right before your eyes.

Remember when you brought your newborn home from the hospital? I remember that day like it was yesterday. While the days and weeks that followed were a bit of a blur, I have a distinct memory of the day I realized my newborn was no longer a newborn. At 2 months old, she had outgrown her 3 month sized clothing and needed 6 month clothing. It was a bitter sweet day; packing up her 3 month clothing knowing she was healthy and growing (and that normal sleep would hopefully follow!) but that she wasn’t going to stay little very long. Before I know it she will be off to university…

DRIP works in the same way. Using the dividends that you receive from a company, additional stock is purchased. Here’s an example to show how DRIP works:

You own 10 shares of Company XYZ on Jan 1 (Number of shares owned = 10)
March 1 Company XYZ declares divided of $1 per share. Total Divided = $10; DRIP purchase 1 share (Number of shares owned = 11)
June 1 Company XYZ declares dividend of $1 per share. Total Dividend = $11; DRIP purchase 1 share (Number of shares owned = 12)
September 1 Company XYZ declares dividend of $1 per share. Total Divided = $12; DRIP purchase 1 share (Number of shares owned = 13)
December 1 Company XYZ declares divided of $1 per share. Total Dividend = $13; DRIP purchase 1 share (Number of shares owned = 14)

So at the end of the year, you’ve purchased 4 new shares with the dividends (the remaining $3 is left in your account) and your share count went from 10 to 14.

Benefits of DRIP

  1. Brokerage Operated DRIPs. Not all companies offer DRIP programs. Due the the increasing popularity of DRIPs, investment brokerages offer DRIP, essentially allowing you to purchase additional shares using your dividends at no extra cost. In Canada, the major banks have no-fee DRIP programs. All you have to do is call and have them set your account to DRIP. A note of importance: if you do not receive enough funds from a dividend to buy a single share, then the cash will be deposited into your account. They will not let you buy half a share!
  2. Company operated DRIPs. A company operated DRIP is just that – the company buys the stocks for you using your dividends. Since you are not purchasing the stock from another investor, rather the company itself there is no commission charged. Sometimes they will allow for partial share purchases.
  3. Dollar-Cost Averaging. While you are only purchasing a few shares every quarter, you are buying stock over a period of time as the stock price moves up and down. If you want further reading on Dollar-Cost Averaging you can read an article here.

DRIP is a great way to increase your investments over time. Before you know it, your portfolio will have grown out of its newborn clothing and into 12 month sized clothes!

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