If you’ve been following me for a while, you probably know how much I am a fan of drip investing. As the title suggests, it really makes investing easier. Drops are one of the fastest ways to organically densify, set, and forget about your money / investments.
What exactly is a drop?
Drip stands for Dividend reinvestment plan in the investment world. Instead of receiving cash dividends, you can essentially get more shares in the company.
Many dividend stocks allow the drip program, but not all. In addition, some drips programs are only intended for certain countries. You can see if they allow this on their website or by looking at the stock on your broker account.
Typically, when you buy a stock in your account, there is some sort of trading fee, but with the Drip program, all new purchases are free. Yes for free! Companies would prefer to keep investing in their company rather than paying out monthly / quarterly cash, etc. Many companies also offer discounts on dripping stocks. For example, Algonquin Power offers a 5% discount off the average market price on dripping stocks. Yes, you immediately got 5% up on all of your lost stocks. Win!
Dripprimer.ca – is a great resource for checking out Canadian stocks and their discounts to benefit from their dividend reinvestment program.
Registration for the drip program
You may think this sounds too good to be true. A discount on new stocks and no trading fees or commissions? How do i start
It’s actually quite simple, go to your broker and sign up to have your stocks drip. Personally, I have a bank with Rbc Direct Investing, all I had to do was give them a call and they set it up. Unfortunately, they are currently set to only drop all stocks or none. You can’t choose which stocks to drop right now. (This can be a downside if you think a stock is overvalued and you have enough income from that particular dividend stock to drip new stocks.)
It may take a few weeks to get everything set up, but for once it’s your laugh.
Full or fractional drip plans
Now you can only sign up for full share drip plans or fractional share drops. I think Canada can only do full drip-drop plans but correct me if I’m wrong. What is the difference now?
Let’s say Company X pays you a cash dividend of $ 40. The current share price is $ 30. (For example, the stock doesn’t offer a drop discount.)
- If you have a full stock drop, you will automatically receive an additional share and the difference of $ 10 in cash.
- A fractional stock drop plan will invest the full $ 40 and give you 1,3333 shares.
Fractional would be absolutely great for higher-valued, low-yielding stocks. Ie CNR I’d love to drain this stock, but it’s going to cost a fair amount of money to lose the full stake.
How do you calculate how many proportions you need to get that full drop? Take Enbridge, for example.
We can see that Enbridge is eligible for the drip program with rbc. Now we need to figure out how many stocks it will take each quarter to get one more stock. The current price per share is $ 37.38 and we can see that they are paying 81 cents per share every quarter. So let’s divide the current share price by its dividend. We get 46.14. So it would take 47 stocks to drop a new stock every quarter.
Another great benefit of drips
So now we know that dropped stocks are commission free and can offer a nice discount on the new stocks. (if the company offers that) You also make investing really easy by simply reinvesting in companies you already like. But what’s another big benefit?
Market crashes. Yes, you’ve read that correctly. A big crash wouldn’t be that bad if you’re a long-term investor. Some people would try to sell their stocks before the price drops any further, etc., etc. But why panic? If you lose your shares, there is a very high chance that you will get more shares and thus lower your cost base on your inventory. Cute!
A market decline greater than 10% can cause certain stocks to fall into more stocks. This is one of my favorite things about drips. It’s just about getting more drops and letting this compounding work its magic! While everyone else is hectic, you can try to be more relaxed knowing that it could benefit you in the long run.
Should I let my dividends drip?
The dividend reinvestment plan is not for everyone. I’ve read numerous bloggers who chose not to sign up for the drip program. They want the money to buy the stocks they are currently interested in or think are undervalued. There are also many who love it. Personally, I’m a huge fan, I own the stocks for a reason. I like them and I think they are good companies. I would like to purchase more of these. Every month my new drips add to our dividend income.
In my opinion, the drip program is another great tool that will help you top up and grow your passive income through dividend investments. The other methods would be investing new cash in the market and increasing dividends. Combine all 3 and your snowball is sure to grow!
Are you currently putting your dividends on drops? Why or why not?
Get these drops!
Hey, I’m Rob, Canadian Passive Income Creator.
In 2011, my wife and I were nearly $ 60,000 in debt and $ 7,000 in net negative assets. Through hard work and financial education, we paid for all of this. Now let’s focus on increasing our passive income streams to make the money work for us. Feel free to follow along the journey by clicking the social media links below or subscribing to be informed of new posts in the sidebar.