I’ve followed Ellen Roseman’s personal finance columns in the Sunday Toronto Star for more than a few years now, off and on, always looking forward to the possibility that I might find a new little financial gem of advice in there. Sometimes, I have. Most of the time I’m reminded and reinspired about what I do already know from reading I’ve already done. But

it’s rare to get the feeling “Hey, I’ve Already Written About That Myself!”:)

This Sunday’s column was all about DRIPPING! That’s right, it’s what I’ve been telling friends about for a while now and I’ve written about it already on this site in several places (and I’ve been doing it myself for almost a decade) — see some of the related posts below this one. Turns out that Roseman’s provided yet another public face in confirmation of these financial gems of solutions to your investing daydreams. Want to be invested, not sure how? Think it’s too expensive? Think you need to know alot of technical information before you can do it effectively?

Start simple with DRIPs.
Over time you can bring your effective cost to zero using DRIPs.
DRIPs are so easy to understand that kids can build their wealth with them, too.

The only worry I have with DRIPs going mainstream is that they become easier fodder for the brokers and regulators and provide new ways to take advantage of the small investor. I’m not sure exactly how this would happen but it’s always there in the background. Call me paranoid. The general idea has always been that DRIPs weren’t advertised and many people didn’t know about them, because if they did, brokers wouldn’t like the fact that they’d lose all their commissions to these fee-free plans. I have to wonder how many brokers actually use DRIPs themselves for their own finances. On the other hand,

a greater public eye towards DRIPs might be a good thing if enough DIY investors move away from the brokers so that they can save money - alot of money - through DRIPs.

And remember, I’m not talking about simply reinvesting your dividends on stocks you already hold at BMO Investorline or TD Waterhouse. Those aren’t really DRIPs. DRIPs are what you use when you invest directly with the company itself (going through their transfer agent, of course). But people have used this argument with Mutual Funds in the face of low-cost ETFs. The reasoning is that with the new low costs of ETFs, and their rising popularity, mutual fund costs should go down if less people put their money in them. We’ve already seen some of that in Canada - apparently we’ve all been sitting on, hoarding our cash this year rather than plopping it into the usual funds. But I can tell you that none of my mutual fund fees have dropped, and it doesn’t look like there have been any major trends that way across the board.

It took quite a bit of industry advertising to create the ETF boom we see today - they’ve really taken off since about 2003 or so in the mainstream, but even more more recently than that. For some reason, I don’t think DRIPs will ever become that popular. First, they require more work and individual attention and analysis (not alot by any means, but way more than you need to do with a broker, who does all of that for you). Second, they’re — shh! — *boring*. Yeah, that common criticism does ring a bell. They just do their work quietly behind the scenes. They’re long-term investments and if you can automate them, they’ll become duller than dry paint. But they work! Why introduce complications when you don’t need to.

Roseman will be doing a follow-up column next week. While it’s great to see, you can’t fit much into those three little print columns. Hopefully you will come back here too for more information on these plans. Send me your questions and comments. I can plan future posts around your specific inquiries (I already have). Tell me about your latest DRIP!

I should offer another plug for Roseman, too. You can read through all of her previous articles in a great archive on the Star’s site here. It’s wonderful if you’ve missed a week or just don’t subscribe to the Star. I know I skip through most of the front section and head right away to those back two pages in “Business” each Sunday. But if you’d like even more reading, Roseman has her own blog, too, which I highly recommend.

For Father’s Day this past Sunday we went out for breakfast at a nice buffet bar (where everyone else had decided to go for breakfast too). My Dad wasn’t in the greatest of moods when we set off, but by the end of the meal I could see he was mentally in a very different place. I had unwittingly and unexpectedly given my parents another round of my financial pump-you-up pep talks, and got them feeling excited again about investing and saving for their future. It’s like taking care of a plant: it needs a little extra water now and then. The dream can’t always water itself in the beginning. Anyways, I left feeling more inspired as well, because it just motivates me even more when I can see my own parents get visionary again. It’s all too easy for them to get stuck in a mental rut.

I Showed My Mom How Growing Her Dividends Through DRIPs Would Increase Her Wealth More Than a Mutual Fund Would

A while back I finally enticed my mom into enrolling in the Bank of Nova Scotia (Scotiabank) direct investing program. I’d been somewhat worried about their holdings, kept for years in the hands of an advisor who always spoke rather obliquely and seemed to make the decisions that my parents just agreed to because he spoke convincingly (hmm, like myself….). It turns out that my parents were invested in all kinds of stuff they had no idea about. Now, they’re not total investing newbies; they understand in basic terms how a mutual fund works, and GICs, and they know they need to be invested, etc., but that’s about the extent of their investment knowledge.

My mom was enrolled in several bloated “growth” mutual funds and when I asked her if she knew what exactly she was invested in (i.e., what stocks the fund held), of course she couldn’t say. She didn’t even know what the MERs were on the funds she held! So one day I looked it all up for her. Turns out she had her money in some generic fast food chains, tobacco stocks, small-cap American companies we’d never heard of, Coca-cola and other mixed-bag goodies. For some people, these companies would be a great choice. Not for me, though. And not for my mother. And not at MERs pushing 3%. She and my dad eventually ended up getting their funds out of this broker’s company (who was a friend of a friend of the family) and putting it into the bank where they would be able to decide what to do next with it and keep strict track of it online.

One day (after another family breakfast) we headed to the nearest bookstore and mom followed me over to the financial section. Somehow it came up and I threw out the suggestion, very nonchalantly (that’s the only way it would work), that I could show her how to invest in stocks without paying fees and without needing a broker - it would be as easy as sending a cheque in whenever she wanted. This time, she finally listened to me! I think because she could tell that I was onto something and she didn’t want to feel left out.

Banks and Real Estate REITs for Mom; Oil and Gas Stocks for Dad

So I transferred over a share in Scotiabank and a unit in RioCan REIT. It took a few months to complete this process. I had to take the physical share certficates that were in my name and take them into the nearest Bank of Montreal in order to get “Medallion Stamped.” STAMP refers to the Securities Transfer Association Medallion Program. This is the official standard for verifying the exchange of the security from one shareholder to another. The bank manager (or assistant bank manager) has to go to the back of the bank and pull out the Medallion stamp - they rarely have to use it, and it’s kept in the back for security purposes - and they bring it out, check my ID, and stamp the back of the certificate. Then I need to sign it while they witness my signature. Then the manager himself/herself also has to sign the stamp. This is the “signature guarantee.” In fact, the whole STAMP is the signature guarantee. Then I mail this in to the Transfer Agent (Computershare and CIBC Mellon) with the requisite letter and it takes them about two weeks to process it. My mom receives a certificate in the mail, and she can start dripping.

My mom’s an earlier adopter with everything than my Dad is. That’s why I didn’t start talking to him about DRIPs (dividend reinvestment plans, or direct stock purchase plans) until recently. Once he sees her get into it, he’ll follow. I asked him if he’d be interested in owning the gas company in order to get some of his money back on all the gasoline he buys. Or how about the pipelines themselves that deliver that gas in various forms? Or a company like Enbridge, that makes money off their heating bills? Yes, yes, and yes. Instead of complaining about rising gas prices, just buy the gas companies! And what better way to do it than for FREE and at a DISCOUNT? (Some direct investment plans will give you a deal on the market price of each share: can’t beat that.) What really hooked my Dad, though, was simply just the fact that he can send a cheque in whenever he wants. He’s not obliged to. And this keeps him in control of his investment. It creates more of a feeling of personal ownership (and responsibility) of the stock, and simultaneously, more of the feeling that you’re in control of your own future. After all, if you just buy stocks through a broker — especially if you’re buying for growth rather than cashflow — you’re at the mercy of the market. It’s also a leaky investment - you can pay up to $29 in commissions each time. If you DRIP, though, you dollar cost average over time, so you don’t need to care so much about the stock price going up and down. It’s the dividends (and the chronological diversification) that matter most. At least, this is the ideal investor profile, and this is the best vehicle for it.

If you like dividends, and you’re investing for the long-term, you should be in DRIPs

So let me summarize for you what I told my parents on the weekend:

• set aside even just $100/month and write a cheque to one of the big banks
• rising bank fees? Who cares? Just Buy the Bank!
• you can send a cheque in whenever you want. You don’t have to when the money’s tight.
• buy stocks and you’ll have a better shot at keeping up with inflation: THESE BOATS FLOAT
• your mutual fund is invested in these companies anyway. Cut out the middleman and his fees!
• wouldn’t it be nice to get a monthly dividend cheque in retirement? Another source of income.
• yes, you have to pay tax on your dividends, but until you’re a near-millionaire, it’s pennies.
• yes, you get a “receipt” each time you send a deposit. They send regular account statements.
• if you choose to invest round amounts (e.g., $100), you’ll always know how much you make
• you never have to contact the company itself. You deal only with their Transfer Agent.
• if you can’t put more money away, stop all automated payments and redirect them to DRIPs
• with some stocks, the dividends increase once a year (or more!)!
• it’s like a high-interest savings account, but the interest rate keeps going up over time!
• Canadian banks are cash-cows! More cash than they know what to do with = higher dividends!
• invest in Scotiabank, and you also invest in China and the Caribbean
• invest in REITs and you get the benefits of real estate without the problems of tenants
• oil prices are only going to go up here on in, so investing in oil and gas is a no-brainer

and I could go on and on.

After all this, my mother said that “if only” they had known about this twenty years ago, they would have been millionaires by now. And it’s true. Between the two of them the income they make is plenty sufficient. Now, though, that the kids are out of the house and their salaries are higher and their mortgage is paid off, hopefully they’ll be able to build wealth even faster than they would have previously. I may have started super early, but I’ve been a student and my income has been held back at the gate for a number of years. So even though they’re starting late, they have enough to invest that it can still really make a difference.

So if You’re Starting Out Late, Don’t Worry - DRIPs Will Be There For You When You’re in Your Nineties Too

More and more of us are living longer these days. We’re eating better, making better decisions and many of us - not all, as I am well aware - are enjoying more prosperity. Don’t think of 65 or 68 or even 70 as a number with magical significance that has any sway over what you do with your life. Some of the most inspiring people I can think of lived up to or past 100 and kept active lives and exercised their creativity all the time. They’re great role models. I hope I can be one of them.

Many financial columnists offer the admonition to make sure that you don’t outlive your nestegg. Well, here’s a better metaphor: keep watering your orchard and it will still bear fruit for you every year. Don’t cut your trees down, just pick the fruit when you need to eat. Money does grow on trees! These trees are called DRIPs.

To read more about DRIPs, see my previous posts here and here.
To have it explained in print form, get this book here.

This ranking is somewhat arbitrary insofar as it is based upon my own opinions and preferences as a long-time DRIP investor, but I am basing it on certain objective and easily obtainable criteria, such as:

(1) whether the plan offers a discount on reinvestment,
(2) whether it requires a minimum amount for making an optional cash purchase (and how much it is),
(3) how often it invests (more frequently is better),
(4) how often it increases its dividend,
(5) the current dividend yield,
(6) how often the stock tends to split and
(7) which Transfer Agent is used (I find Computershare easier to deal with; more user-friendly statements)

I’m also only going to evaluate Canadian corporations. I have purposefully omitted the many income trusts and income funds that have DRIPs because by 2011 some of them may have converted back into a corporate structure and may no longer offer DRIPs. In the past few months, some of these trusts have already suspended their dividend reinvestment plans. So based on these major criteria, here’s my ranking for the best DRIPs for the long-term, buy-and-hold DRIP investor. The links I have included direct you to the relevant Investor Relations pages. If the links change over time, you can go back to the company’s home page and find their IR centre from there.

Best Canadian DRIP Investments

1. Bank of Montreal (monthly, Computershare, frequent increase, no minimum, splits)
2. Bank of Nova Scotia (monthly, Computershare, frequent increase, splits)
3. TransCanada (discount, Computershare, frequent increase)
4. CIBC (monthly, frequent increase, yield)
5. Enbridge (discount, frequent increase)
6. Telus (Computershare, frequent increase, growth)
7. BellAliant (monthly, no minimum)
8. Suncor (Computershare, splits, growth)
9. TransAlta (growth)
10. Canadian General Investments (Computershare, diversified)

Two other factors not taken into account here that you might want to consider also are (1) how quickly the company cashes your cheque (I find this convenient - sometimes you can wait 2 months or more before they take it; the alternative is to figure out when they cash it exactly so you can send it just beforehand. But your timing has to be very good.) and (2) the ratio of share price to yield: so you can see how quickly your money can grow through reinvestment. A stock price of $100 and only a 1% yield will take much longer to snowball than a stock price of $40 and a 5% yield. And obviously, of course, you want to think about the company itself and if that’s a company you want to invest in at all. I did not include Pulse Data, for example, because I am not convinced yet that it is an investment for me. It does, however, have a DRIP plan you can check out.

Why the above criteria? Over time they have been what makes any DRIP plan great, in my opinion. This can include simply being more convenient, but factors like the discounts on reinvested amounts can help with growth. If you have a stock that (1) splits regularly, (2) offers a discount on reinvestments, (3) increases its dividend yearly (or more), and (4) enjoys overall earnings growth, you have an excellent DRIP stock and you’ll get really excited about it. That’s why I’d have to say Bank of Montreal is one of the most exciting DRIPs. But you may have other favourites. If you’re already invested in some of these DRIPs, what do you think of this ranking?

Another factor to include in a future rankings list would be which of these companies’ plans is open to foreign investors. In a future post (perhaps with the help of a friend south of the border), I’ll include a ranking of some of the best US DRIPs. This will be much harder to evaluate since there are so many of them. Feel free to send me in your favourites.