To DRIP or not to DRIP?

One of my main goals as an investor is to be open to other points of view. Learning from the successes and failures of others will only help me in the long-term. To that end, after one of my favourite dividend bloggers, Monsieur Dividende, indicated last week that he DRIP-ped the shares in his RRSP, I decided to explore the possibility of DRIP-ping again.

Before my blogging days, I decided against enrolling in Dividend Re-Investment Programs (“DRIP”) run by companies in which I held shares. Such DRIP programs allow shareholders to use dividends earned from their shares to automatically purchase additional shares of the company. These additional purchases are usually done at no cost to the investor, and most of the time at a discount to the market price of the company’s shares. Even though DRIP programs are great in theory, I had some reasons for not enrolling in them:

1.       Time and cost to initially enroll in the DRIP. Having talked to my discount brokerage about five years ago about a DRIP that interested me, it quickly became obvious that there was some leg work I’d have to do before I was able to register for the DRIP. At the time, the effort required was greater than my perception of the benefit I’d realize once enrolled.

2.       The idea of buying shares at inopportune times. I like to buy shares in companies when they are on sale for less than I think they are worth. Call it market timing if you want, but I continue to prefer stocks trading near 52-week lows or that are being sold off for no company-specific reason.

3.       The satisfaction of cash deposited into my account stops. Having dividends deposited into my investment accounts each month opens up a universe of possibilities. I can use that cash for anything, including buying more shares of the company that gave it to me.

Of the above reasons, the second and third still hold true. In contrast, although there’s still some effort in enrolling in DRIP programs, my recent research suggests that it’s now a less cumbersome process. Additionally, I see a couple of obvious benefits besides buying additional shares of companies I like with no brokerage fees and at a discount:

1.       Negating the USD/CAD exchange rate. My brokerage offers me a low exchange rate when converting my USD dividends into CAD, and then charges me a high rate when I buy shares in US companies. By using USD dividends to buy shares directly through the US companies I own, I’d be removing my brokerage and their uncompetitive exchange rates from the investing equation.

2.       Using the discount in share price to accelerate my accumulation phase. Although the discount rate companies offer on their shares through their DRIP programs tend to vary between 0 – 4%, a decent discount rate can take the sting out of buying shares at higher prices than I’d prefer. Given I’m still in the accumulation phase, a couple percentage points of a discount rate could materially boost my dividend growth rate over time.

3.        Removing emotions from the investing equation. Building on the point above, it’s hard to argue with the mathematical reality of compound interest. As an investor, my emotions influence my investing decisions. Simply putting a portion of my portfolio on ‘automatic’ and letting compound interest work its magic seems logical.

Based on the above reasons and the fact that I don’t foresee any events that would require me using some of the dividends from my investments to cover life expenses, I’m going to further explore DRIP programs offered by some of the companies I own. In particular, I’m most interested to determine the level of discounts on DRIP-ping in some US companies in my RRSP in which I have a lot of confidence (i.e. Realty Income, Omega Healthcare, and Microsoft). I’ll keep you posted if I dip my toes into the DRIP waters.

Do you DRIP any of your dividend stocks?