In 1997 I had some money in a 401k plan, but nothing in "unsheltered" investment capital. Less than $500 in a checking account was my total sum liquid cash assets. I decided to do something to change that situation. After I read the Motley Fool book on Dividend Reinvestment Plans, I selected 12 companies and started my program. Since I started back in 1997 I've NEVER missed my monthly contribution. I started out at $100 per month. I'm now putting $150 per month into my DRiP portfolio along with an extra $2000-$3000 per year when I get my summertime bonus.
Well. my program has grown to a valuation of over $26,000 and I feel just great! It might not seem like a lot of money to some, but I've never had that much cash liquid assets before. Hopefully with continued contributions and reasonable appreciation, when I retire in 10 years the amount will have grown to $100,000.
Thanks DRiP Plans and all my fellow DRiPpers. I now have the habit of "paying myself first" firmly in place and will so for the rest of my life. The discipline of regular savings has had a positive effect on my 401k plan as well as I've increased my contribution from 6% to 10% over the same time period (earnings have doubled).
Bradley Sharp (August 8, 2006 post at dripinvesting.org)
Someone once said DRIPs were the most boring form of investing.' As the print media has portrayed it in the past, just sending a same value investment cheque period after period ad nauseum, it is boring. Such a view removes the individual from the process. However, I can assure you there are as many approaches to the problem of DRIPping as there are people participating.
Bradley's post shows increasing confidence and excitement at achieving a milestone. He's set another already ($100,000). He also adjusted his approach as his circumstances changed raising his contributions from 6% to 10%.Responses to his post showed how others saw different possibilities: Watch for when you start earning a $1,000 a year in dividends or I like it when I start receiving more in dividends than I'm sending as an optional cash payment.
The point here is that there is no one size fits all answer to the problems of DRIPping. How the individual DRIPper invests is unique to their circumstances. What is good or comfortable for one person might not apply to another. I'm bringing this up because I receive a particular question so often it should be addressed.
I wish to get greater diversification. Does it make sense to DRIP through a low-cost broker such as the Canadian ShareOwners Association or Interactive Brokers?
This is an extremely hard question to answer because it requires opinions and one person's circumstances or needs are not the same as another person's. Hopefully this column will act as a guide focusing on some things to consider as you arrive at your own decisions.
Further, there have been some drastic changes in the low-cost brokerage industry lately that will make usage a little easier. Changes have been so fast in coming lately the information in this article could well be out of date by the time you read it.
What DRIPpers appear to be most concerned with are investment fees and the fewer of them the better. While this article is mostly concerned with putting money into an investment it is important to consider other fees such as certificate deposit, certificate issuance, account transfer fees et cetera.
One consideration is the size of the commission you are willing to accept for the service the broker provides.
Let's consider a broker that offers trading for a penny a share but charges $10 a month minimum to maintain the account. You pay the $10 each and every month whether you trade or not. We can ignore the penny per share commission as that is offset by the cost of stamps and envelopes to the DRIPper. So, regardless of any trading this account costs $120 per year.
I've often read one should never pay more than a one time 2% commission. Who decided this I cannot say. In my opinion it is an arbitrary number. Every seasoned investor I've met say they aim for less than 1% commissions. To achieve a 2% commission requires an investment of $500 per month or $6,000 per year. To achieve a 1% commission requires an investment of $1,000 per month or $12,000 per year.
Let's consider a broker that charges a flat $10 per trade. On a single $10 trade it still requires $500 to achieve a 2% commission or $1,000 to achieve a 1% commission.
What about a broker that charges a flat fee of $50 to purchase any number of companies at a time? Certainly, buying 10 companies reduces the commission to $5 per company. However, it is not the size of the commission that is important but the amount that is invested that is. Invest $2,500 and the commission is still 2% regardless if it's one company ($50/$2,500) or spread across ten companies ($5/$250).
I ran a poll several years ago at the Motley Fool (http://www.fool.com). Less than 1% of DRIPpers invested $500 or more per month. The vast majority invested around $250 per month. At $10 per trade that would be a 4% commission. The individual has to decide for themselves how much commission is acceptable.
A second consideration for some is the greater diversification possible through the low commission broker. What I'm about to say some will consider to be heretical. It is definitely an opinion. It could definitely be a wrong opinion. I'm sure I'll receive many e-mails telling me just that. However, it is another approach to the problem of DRIPping:
Diversification for a DRIPper is overrated.
I'll discuss my logic (or lack of) in the next column. However, considering the recent losses of DRIPs in Canada (Alcan, Canadian Oil Sands, etc.) let's look at some potential alternatives now available. Basically, I'll discuss this in terms of commission fees only. However, different investors will have differing needs from an individual broker such as:
- Can you trade daily?
- Are there extra per share fees?
- Is there a membership fee? (Even if you get benefits this should still be considered at least partially as a commission.)
- Can you buy the entire market or only a selection?
- Are there fees to deposit shares and/or fees to remove a certificate from 'street name'?
- Can you buy mutual funds and what are the fees?
- Can you write cheques on the account?
- Can you keep US dividends in $US? How easy is it to trade?
Let's look at a few possibilities and assume generally at least two trades per month (special situations excepted):
Canadian ShareOwners Association (http://www.shareowner.com)
CSA charges a flat $9 per trade or $36 to trade as many companies as you wish from their selection. At two trades per month the commission is 2 x 12 x $9 = $216 per year. To get to a 2% commission requires an investment of $10,800 per year. To get to a 1% commission requires an investment of $21,600 per year. CSA does have a unique 'All You Can Trade' type feature. If you trade four companies or more at a time the maximum commission is $36 total. However, an important thing to consider with here is not the size of the commission but the amount invested. If you traded four or more times per month then the commission is 12 x $36 = $432. To get to a 2% commission requires an investment of $21,600 per year. To get to a 1% commission requires an investment of $43,200 per year. This is regardless whether you trade four or forty companies a month.
Interactive Brokers (http://www.interactivebrokers.com)
Yes, those pennies a share commissions look great but dig deep enough into the fee schedule and you'll find there is a $10 US monthly minimum fee that is roughly equivalent to $11.75 Canadian. At two trades per month the commission is 2 x 12 x $11.75 = $282 per year. To get to a 2% commission requires an investment of $14,100 per year. To get to a 1% commission requires an investment of $28,200 per year.
Trade Freedom (http://www.tradefreedom.com)
Trade Freedom has a flat commission of $9.95 in the currency of the specific country regardless if it is a Canadian or US trade. At two trades per month the commission is 2 x 12 x $9.95 = $238.80 per year. To get to a 2% commission requires an investment of $11,940 per year. To get to a 1% commission requires an investment of $23,880 per year.
Questrade offers two plans: $9.95 flat commission or $4.95 for 500 shares or less. The $9.95 plan is the same as Trade Freedom's commission.
The $4.95 plan (and we'll assume most DRIPpers trade less than 500 shares at a time) at two trades per month the commission is 2 x 12 x $4.95 = $118.80 per year. To get to a 2% commission requires an investment of $5,940 per year. To get to a 1% commission requires an investment of $11,880 per year.
CIBC's Investor's Edge (http://www.investorsedge.cibc.com)
On the day I was submitting this article CIBC announced a new and unique plan. For $395 you can make 50 trades. Subsequent trades are a flat $6.95 commission. This averages just over 4 trades per month.' Regardless of the number of trades you make at $395 per year you need to invest $19,750 to get a 2% commission or $39,500 to get a 1% commission.
The interesting thing though is it appears the banks are now responding to the aggressive pricing of the other discount brokers. Of further note is CIBC Mellon trumpeted the new Manulife DRIP with its $15 OCP fee while more active traders can now buy it through CIBC Investor's Edge for only $6.95 per trade.
The brokerages above definitely provide broader access to the market than is currently available in the Canadian DRIP universe. They also simplify record keeping. I hope this article helps you match these brokers to your individual needs.
Note: While Questrade's $4.95 plan is a clear winner in commissions it is important to look at your total needs as a DRIP investor.
Call to Action
If any of you have had responses to the 'Call to Action' letter please mail or e-mail them to me so others can learn what is happening. I'll have the next list in next month's column.
Robert Gibb, 401-2910 Cook Street, Victoria, BC, V8T 3S7 (250) 383-7075 [email protected]. Robert Gibb is a retired school teacher. He gives seminars on dividend reinvestment plans. Mr. Gibb is a frequent contributor to Internet DRIP boards under the nickname OperaBob.