To DRIP or not to DRIP?
First off we're not talking about faucets or whatever else you're thinking. [For shame! ;)]
Seriously, though, I'm talking about DRIPs in the form of Dividend Reinvestment Plans. Although, in my case, with our portfolio of ETFs, it's more like Distribution Reinvestment Plan.
So what is it exactly?
Well, it's a way to take the dividends earned from stock holdings (or funds like mutual funds or ETFs) and puts it back (or reinvests) into the same funds for free and possibly at a rate lower than market value.
Let's say you own 1,000 shares of ABC company at $10 a share. ABC company announces a dividend of $1! (They had a particularly good year.) When they give you your dividends, instead they will give you 100 additional shares of ABC instead (1,000 shares x $1 per share = $1,000. At $10 a share, that's 100 shares.)
You'll now have 1,100 shares that will earn the $1 a share the next time dividends are handed out.
Of course, that's not the only benefit. Let's say ABC company announces DRIP shares will be handed out at $9 a share instead of the market rate of $10 a share. That means you'll receive 111 shares instead (plus $1) into your account. By giving you the shares at a discounted rate, you get 11 more shares!
Of course, if there's no discounted rate, why DRIP in the first place? If you're going to get the shares for $10 each anyway, why not just receive the money and then buy the shares?
Well, the answer to that is commissions.
Generally speaking, you need to use a brokerage to purchase stocks or ETFs. By using a brokerage, you will need to pay commissions on any purchases or sale of stock and ETFs.
Some brokerages in Canada charge up to $30 a trade!
Holy crow! No wonder people DRIP.
If you are one of the unlucky ones with that kind of fee, you'll only be able to purchase an additional 70 shares of ABC company after you received your dividends.
However, with the existence of discount brokerages, the big banks only charge around $10 a trade, so that's not too bad.
Wifey and I are using Questrade. They charge $4.95 per trade + $0.01 for each share for a total maximum commission of $9.95. Not bad. But that's not why we're with Questrade. The main reason is their commission FREE purchases of ETFs.
That's right no fees for buying ETFs.
So to answer the question that was posed to me. I do not DRIP with my Questrade account. Instead, I take all the distributions that are given to me and use the money to purchase new ETFs to help move my portfolio closer to my targeted allocation. A few hundred dollars each month isn't going to make much of a difference in a portfolio worth 6 figures.
I do drip with our TD e-series account, though. There are no commissions (unless you sell within 90 days), however, they do have a minimum purchase requirement for each fund. I believe it's $100. It is $25 if you use pre-authorized withdrawals. As we only get a few bucks each month, it's better to just DRIP otherwise we'd have money sitting in the money market fund we cannot move unless we reach $100 or we deposit additional funds into the money market fund first, before purchasing other funds.
Of course, this $100 is for each fund and not $100 split into your four funds. If you you only need to deposit $90 into your US fund to rebalance your portfolio, you cannot do it. This is why we DRIP in the TD e-series funds.
So the answer is that it depends. I DRIP and I don't DRIP.
I better not say that out loud.