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Why You Should First Invest in Dividend Reinvestment Plans (DRIPs)
Last night I spent some time on investment chats and heard a lot of questions from young people (and those with a lot of dollars to invest) about what they should invest in first. Some of these people haven’t even started reading about investing for themselves yet, but were hoping to get some good, quick advice online. In this post I will answer their questions.
RRSPs and 401Ks aren’t for everyone
I think the first (and best) thing you should invest in is a small selection (3-5) of Dividend Reinvestment Plans (DRIPs). But I’ll put a little spin on it: If you’re lucky enough to have an RRSP or 401K where your employer matches your contributions, then by all means max that out first. It’s free money, as they say. You can also have your own RRSP or 401K without these additional cash gifts. And if your income is high enough to benefit from any reductions that RRSP/401K contributions may bring, then certainly this maximum is.
I disagree that maxing out a retirement savings plan should be everyone’s first priority. At some income levels, you simply don’t need to because the benefits don’t outweigh the benefits you could get from raising cash through non-registered investments. When I realized that I was putting money into a plan that I hadn’t been able to use for over forty years, and that I was currently getting some kind of tax savings or benefit from it, I stopped. I haven’t stopped investing. I diverted the money elsewhere. If you’re a student, there are better ways to maximize your “money energy” for today than to spend it hoping for tomorrow. This is especially true if you attend graduate school or professional school of any kind.
Start digging your way to riches
Even if you still want to invest in that future utopian era of your life called retirement, there are probably better ways to do it than registered savings plan annual fees, trading commissions, and mutual fund fees. [Let me pause for a moment and qualify this, too: there are brokers where you can hold 401Ks with no annual fee, and there are many index funds with super low MERs that you can put in them, and if your net worth is already above a certain amount (like 100,000K) you might not need to pay any commissions at some brokers at all, or a really low amount like $4.95.] Many people’s money is still stuck in mutual funds where they don’t know what they’re really invested in. (But I’ll save my thoughts on mutual funds for another post). A DRIP, on the other hand, will allow you to invest in stocks for as little as $25 or $50. You can do this monthly and slowly build up a dividend paying portfolio that distributes money to you monthly or quarterly. Money you can use NOW.
No fees, you only need $50
Because DRIPs (dividend reinvestment plans) are offered by the company itself and managed by entities known as transfer agents, they bypass the middleman, the stockbroker of yesteryear. Admittedly, I’m a bit surprised to hear that anyone relies heavily on the services of a stockbroker. This is because of my do-it-yourself style of investing, as well as the vehicles I invest in. I don’t try to time the market, I don’t do options, futures and shorts. I don’t invest on margin. All this will seriously complicate your life, in my opinion.
Because DRIPs cut out the middleman, they save on all those fees. It also means that for many DRIPs (at least in the US; Canada is a bit different), you don’t even need to use a broker at all. You can simply buy your shares directly from the company. Wow. You really have to think about how amazing that is. Perhaps only those who have been in the brokerage business for many years can truly appreciate this.
Perfect for young investors just starting out
In addition to the fact that you can save a lot of money, you get the peace of mind of knowing that you have invested in some slightly more stable, reliable companies (by definition, a DRIP requires a company to pay dividends – and although some will argue (sometimes right) that doesn’t mean the company is in a better financial position, historically speaking companies that pay dividends and are able to increase their dividends every year have great fundamentals and are also good growth stocks (obviously!) not fads or amazing promotions like Nortel once did).
But because you can invest in a DRIP for as little as $25, even $10 with some companies, DRIPs are ideal for children, teenagers, students, the self-employed, and other low- or sporadic-income groups who can tap into some “extra” cash only from time to time. time or irregularly. But don’t think that DRIPs can’t be the foundation of the portfolios of the very wealthy or high net worth individuals. I know the nickname “DRIPs” sounds a little dumb, but it’s the real deal. There really is no other way to grow your money this quickly and efficiently (I’m sure the non-legally inclined have their own, better ideas, but I’m not interested, and I guess you shouldn’t be either) .
There aren’t many downsides
So what’s the catch, right? There are a few small niggles with some of the DRIPs, but overall they’re hardly detractors from this vehicle across the board. Here are some of them. You’ll find that some of them aren’t even relevant to your situation.
(1) You still have to pay dividends and capital gains taxes when you sell (but the divs are taxed less than your employment income!)
(2) You can only invest on a specific schedule. Some companies will take your money monthly, others only quarterly. And they will do it on a certain day. This means that:
(3) You have no control over the price you pay. While you may decide that you will send a single contribution of $100, you cannot control whether the stock will go up or down on the day the company invests for you. However, this usually only applies to those working in the hypermarket. You will have a general idea of whether the stock is selling or not. If it’s on sale, grab it while it’s low. Send a check for this month.
(4) Not all companies offer droppers. You may still need to use a broker if you really want to invest in your favorite company – or companies that don’t pay dividends.
(5) Some DRIPs actually charge small fees for purchases and reinvestments. This is by far the worst on this list. But my advice is to simply not invest in these companies. There are enough DRIPs that you can build a nice portfolio without having to pay for it.
(6) More detailed record keeping than if you held the shares with a broker. Some people are worried about it. But it’s not that bad. It just means that you need to be aware of the emails and news they send you (for example, let’s say your company is bought out and you need to send the certificate back – you don’t want to miss the deadline). You can ignore most of what they send you (I never vote by proxy, I don’t go to shareholder meetings, and I don’t even read annual reports most of the time – I will in the future when I have more time).
Where to start
How to get started in DRIPs depends on where you are a citizen. I don’t know much about “Dripping” in the UK or Australia so would love to hear from anyone who lives there. However, if you’re in Canada, you need to do one of two things: (1) buy your first stock from a stockbroker like BMO Investorline or TD Waterhouse. (2) find a friend or someone else who already owns shares in the company you want to transfer your share to (after you pay him/her for it, of course!). For Canadian DRIPs, there is also a pretty good online list of Canadian DRIPs available (but not updated as often as we would like). If you’re in the US, it’s much easier to get started because there are hundreds of DRIP companies (compared to Canada’s…thirty?) and many will let you buy directly from them. Some, however, require you to buy the share yourself first. In this case, just choose your favorite (cheap!) broker and get a share.
If you first buy the share yourself, you will also need to “certify” it. These are additional one-time costs that you have to put up with. Some brokers will charge as little as $20.00 per certificate – this is why I like ENorthern in Canada. Major banks here will charge up to $52.00 for the same certificate. So when you’re checking out brokers, be sure to also check out their certificate fees – not just their regular trading fees.
In any case, you should first go to the company’s website and find out if they offer DRIP and if so, how to sign up for it. They’ll tell you who their transfer agent is (in Canada it’s CIBC Mellon and Computershare; in the US it’s Computershare, BNY Mellon, JP Morgan, Wells Fargo, and others) and where to send the check. But that’s all! From there it’s easy. Transfer agents can be thought of as “administrative assistants” or “secretaries” who do all the bookkeeping and customer service related to these DRIP plans on behalf of the companies. If you drop Pepsi-Cola (PEP), for example, you’ll never deal with anyone at Pepsi itself. You will deal with their transfer agent, BNY Mellon, from whom you can buy Pepsi directly.
Switching from MoneyPaper
In addition to the above ways to register for DRIP, you can use MoneyPaper. They are an independent service that helps people sign up and get their first share and I have heard they are very easy to deal with and really make the process easy because they do the paperwork for you. On the other hand, they’re not a big company, so you can’t expect an email response from them very quickly. They publish an annual guide to buying stocks directly. One great book that explains everything you need to know about DRIP is George Fisher’s All About DRIP and DSP. (DSPs refer to direct share purchase plans, which is what you do when you buy directly from a company without requiring the first share).
There’s a lot more to DRIP than what I’ve covered here so far, but that’s enough to get you started. If you’ve just been given $5,000 or have an extra $100 and you’ve decided it’s time to start investing, I strongly encourage you to familiarize yourself with DRIPs and familiarize yourself with the basics offered by the company you’re dealing with. acquaintances immediately. When you invest, you can learn more about the DRIP universe. But nothing compares to these gems of the investment world. They’re no longer the “best kept secret,” but it’s still amazing that we don’t hear more about them than we do. Of course, then the brokers will no longer receive their commissions.
Let’s talk about droppers!
If you want to know more, or have questions, or want to tell me all about why you think DRIP is the WORST investment tool 🙂 feel free to email me (my hotmail name 🙂 What I have written here so far only the surface of the world in many ways. I’ve been investing in DRIP for eight years now, and while I’m not a millionaire yet, that’s because I’ve also been a student all this time 🙂 So send me your thoughts and let me know if I can help you.
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