Ready to buy your first share in a Canadian DRIP plan?  Deciding which Canadian DRIP stock to invest in first?

A reader suggested that I post an update to my previous ranking of the top ten Canadian DRIPs to take into consideration what I’d say now, at the beginning of 2010, one and a half years later.

One of the big changes, of course, is that many of Canada’s income trusts will be converting to corporations either before or shortly after 2011, and many Canadian DRIPs are DRIPs of income trusts.

This means that it may not be worth your time to start up a DRIP today in an income trust that’s going to convert to a dividend-paying corporation.  They’ll still pay dividends, but the dividend might be lower and it will be paid less frequently.  There is no single determined list of which income trusts will change their status and convert – you need to research it on a trust-by-trust basis.  Many have already converted, and some will stick around in income trust form for an extra year or two.  See my list of Canada’s top 45 income trusts for comparison’s purposes.

Should You Sell Your Income Trusts Before 2011?

Criteria for Excellent DRIP Plans

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I’ve learned that (in my opinion, of course) the companies that make the best DRIPs meet the following criteria:

1. They are a growth company or on a growth track;
2. They raise their dividends on a frequent (preferably yearly) basis;
3. They’re in conservative, less volatile sectors/industries.

Why?

These criteria might sound obvious, but they’re not.  There are plenty of DRIP plans in Canada, and even more in the U.S., that would not meet all of these criteria.  Look at it this way: it’s often in a company’s advantage to have a DRIP plan because it saves them money and helps keep capital at their disposal.  They don’t necessarily set up the DRIP just to be helpful to you, the little investor.

I’ve had a good handful of DRIPs that were bad ideas.  I’ve actively cancelled two DRIP plans and I’ve seen another one suspended and cancelled of its own accord.  There’s another one (three, actually) that I’m planning on retiring soon, when the time is right.  Because they either don’t meet all of the above criteria, or there is some other reason that doesn’t make them appropriate as a DRIP anymore.

How to Decide Which Canadian Bank to Invest In

Top Canadian DRIP Picks for 2010

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This time I’m going to limit the list to five.  I’ll share with you my current favourites, the ones I’m investing in next myself.  As always, do your own research and make your own decisions – but I’m happy to talk with you about your decisions, too.

1. TransCanada Pipelines (TSX: TRP) – TransCanada is a relatively stable stock.  It’s a utility, dealing mainly in pipeline transportation – so it has indirect commodity exposure and isn’t as affected when energy prices shoot up or down.  It also increases its dividend on a regular basis and even better, the DRIP has a small discount on the reinvested amount, so you’re getting more stock for the market value.  It is also poised for modest growth and analysts like it going forward.

2. Enbridge (TSX: ENB) – Enbridge is a close cousin of TransCanada, involved in energy distribution.  It’s even more stable price-wise and also offers a discount on reinvested fractional amounts.  There may not be as much upward growth with Enbridge, but this is a steadily increasing dividend that won’t keep you awake at night.  Another great defensive pick.

Canada’s Top Defensive Stocks

3. Suncor (TSX: SU) – Suncor is Canada’s #1 or #2 oil blue-chip stock.  It runs an integrated oil business and is more diversified than buying something like the Canadian Oil Sands trust.  The downside is that the dividends are not that large right now, but they do grow over time and this stock likes to split every now and then (when energy prices push the share prices up high enough, the stock will split – which means your shares have more room to grow again).  Suncor is definitely in an in-demand sector and the DRIP plan is a great way to pick this one up for no fees.

Suncor (SU) vs. Canadian Oil Sands (COS.UN)

4. RioCan REIT (TSX: REI.UN) – RioCan is Canada’s largest commercial real estate trust.  It’s a trust, but it won’t be subject to the 2011 rules – it will stay just as it is, which makes it great to DRIP because it pays out monthly.  Moreover, RioCan didn’t cut its distributions during the Great Recession – in fact, it raised them.  Canada’s economy won’t grow without some of the pie going to RioCan, so I think it’s a fairly defensive bet, albeit slightly more risky than an Enbridge.

Investing in Canada’s Real Estate Market

5. Telus (TSX: T) – Telus is a growing telecommunications company in Western Canada focusing on the wireless business.  It competes with BCE and Rogers (TSX: RCI.B), but still has lots of room to grow – definitely much more room to grow than BCE does.  And Rogers doesn’t have a DRIP plan.  Even better, Telus has a discount on reinvestment, now, too.

The banks are always popular, but they’ve definitely hit some temporary ceilings and you might as well wait a bit before buying in – unless they correct (drop) significantly in the short term (make sure you’re not buying at the 52-week high on any of these stocks).

If you’re deciding between any of these stocks, you want to compare such things as (1) price – we can never market time exactly, but there are better times to buy a stock than others, (2) yield – how much of a dividend is it paying? and (3) company news – is there anything on the horizon you should know about before committing to the stock?  Read the company’s website and press releases and make your own decision.

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