DRIP is an acronym for Dividend ReInvestment Plan.
Canadian companies that are traded on the Toronto Stock Exchange (TSX), can decide to use the money they earn as profits to pay their shareholders. This payment is called a Dividend. Obviously, not all companies make money, and as such not all companies pay dividends. Likewise, just because a company is profitable doesn't mean it will pay a dividend.
Let us pretend you owned 100 shares of a company and a dividend is declared of $0.25 per share, you would get $25.00. Since most dividends are regular and quarterly, you would receive $25 every 3 month unless the company lowered, increased or stopped the dividend.
Now what to do with that dividend payment? Well, some Canadian companies offer to its shareholders the option of reinvesting that dividend payment by buying more shares in the company. Instead of receiving a cheque, you would receive more stock in the company. This is called a DRIP.
A slight difference is with Income Trusts (Royalty Trusts, Real Estate Income Trusts, etc...) is that they pay what's called a Distribution and is most often monthly. Distribution Reinvestment Plans exist just the same as regular DRIPs and the term is used interchangeably.
DRIPs are very beneficial to shareholders since they offer many great features. The biggest being Fractional Share Purchases of your dividend payment.
This would repeat each quarter, so long as the dividend is paid and would be adjusted for the determined share price. So even if you only owned a few shares, you'd still benefit from the power of compounding.
SPP is an acronym for Share Purchase Plan.
Another benefit of DRIPs is if the company offers a complementary Share Purchase Plan, or SPP. A SPP allows shareholders to make Optional Cash Purchases (OCP) whenever they want to buy additional shares at no extra cost. You could decide to mail in a cheque for $200 and shares would be bought for you, and right away those shares are included in the DRIP. Just like the DRIP, OCP purchases are Fractional Share Purchases. You can do these purchases whenever you want, and are completely optional.
EXAMPLE: $200.00 Optional Cash Purchase, Share Price of $43.90, Your OCP would buy 4.555 Shares
Finally, the majority of DRIPs are completely FREE! So you can reinvest and buy more for next to nothing! Compare this to discount brokers who charge anywhere from $5-$35 for each purchase. This means more of your money gets invested, and reinvested and compounded over time. Starting to get the picture?
Do you wonder why big banks, mutual fund companies and investment dealers don't want you to know about them?
As you can see DRIPs/SPPs are intended for long-term shareholders who are looking for stable, dependable (Blue Chip) growth of their investments. As with all investments in stocks, there is a risk since the share price could go up or down. But the main idea for DRIPs/SPPs investors is to find companies who regularly pay a dividend, quarter after quarter, and increase that dividend at least once per year. Companies such as Mergent and S&P keep track of which Canadian companies meet these criteria.
Be sure to check out the Canadian DRIP Primer on how to get started in DRIPs, as well as the list of Canadian Companies who offer DRIPs/SPPs:
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