Notes

Outline

Dividend Re-Investment Plans Andre J. Trottier

Introduction Individual Investor, Retired 1997 Invested from 1975-82 Canadian Moneysaver Articles Leveraging Split Shares Frictional Costs

Topics of Discussion Frictional Costs DRIP Power of Dividends Efficiency Simplicity Getting Started

Taxes, Loads & Fees Most certain components Negative components Effective management will do most to enhance returns Goal be avoiding  them…..No Do they really matter?….Yes

Taxes Ontario $30,754, MTR 28.16% Tax Factor  =  1.00 = 1.39                           1.00 - 0.2816 (MTR) Earn $1.39 to keep $1.00 18.9% VISA = 18.9 X 1.39 or 26.27%

Federal Personal Tax Rates $30,754 or Less----------16% $30,754 to $61,508------22% $61,629 to $100,00------26% $100,000+------------------29%

Tax Avoidance Strategies Defer income Arrange income to be Tax Efficient Capital gains & dividends Interest instruments in RSP

Management Expense Ratios (MERs) Canadian average 2.50% Was 2.30% in 1997 US Average 1.35%

Rule of 40 Take 40 and divide it by the MER number of years to consume 1/3 of your investment 40 / 2.5%  =  16 yrs front end load of 33%

Your Mutual Fund Manager Really Charging You? True Cost per $100,000.00 invested MER      10 yrs 20 yrs         30 yrs 1.0%      $9,250 $18,130       $25,950 1.5%     $13,930 $25,920       $36,240 2.0%     $18,130 $32,970       $45,120 3.0%     $25,920 $45,120       $59,340 Fee Impact calculator http://strategis.ic.gc.ca

Diminishing Returns 1993 43 Top Quartile  Mgrs 1994 14 out the 43 1995 5 out the 43 1996 2 out the 43 1997 0 out the 43

Mutual Fund Facts “Outperformance” will "Regress to the Mean" the 1990s 80% of Canadian Funds "Did not beat the averages" Efficient investing: Never pay >2% commission, total Funds charge 2.5%/yr

Regression to the Mean

Tradex Equity Fund -open only to public servants -since 1961, avg 11% return/yr -Philips Hager & North - Globefund top 15 funds for 15 year performance -"lucky to be a Public Servant“ Reason   1.35% MER

John Bogle The easiest and surest way for a fund to achieve the top quartile in investment performance among peer funds is to achieve the bottom quartile in expenses.

Nortel Employee BMO Funds 1.5% MER Year         Amount           1.5% Fee             Direct 2001      $120,000 $1,800       $120,000 2010      $332,769 $4,991       $375,079 2020     $1,033,531         $15,502         $1,330,768 2027     $2,284,806         $34,272      $3,229,041

A. Trottier’s Situation AGF American Growth 2.88% AIC Advantage 2 2.72% AGF International Stock Class 2.85% Fidelity Focus Health Care 2.68%

2.80% MER Chart Year         Amount           2.8% Fee             Direct 2001        $120,000            $3,360             $120,000 2010        $299,577     $8,388             $375,097 2020         $827,915           $23,181          $1,330,768 2027      $1,706,435          $47,780           $3,229,041 2027         $2,284,806         $34,272              $3,229,041

MER Effect on Wealth

MER and Returns

Fund Problems To equal TSE 300, must beat it by 2.5% to be equal Cash position earns low returns Transaction costs Manger focused on “Performance”

Tax Efficiency Capital Gains distributed to holders Holders pay the tax No control, just tax liability Unrealized Capital Gains i. e. MSFT on original IPO AIC Advantage BRK.A at $3500 4th Qtr purchase = year’s liability

10 yr Pre & Post Tax Returns (US )

Don’t Worry No big deal, you don’t have to worry about risking your life savings, “We do that for you.”

Gold, Frankincense and MER Most certain aspect Distinctly “negative” aspect Effective mgmt=enhanced returns Do Loads & Fees matter? ABSOLUTELY

The Money Machine How the mutual fund Industry works Daniel Stoffman Page 220 Should I buy individual stocks as well as, or instead of mutual funds? If you've read this far, you've probably figured this out for yourself.

DRIP Defined Dividends are not paid to holder Money buys additional shares Additional shares yield dividend These dividends create additional shares Thus the Dividend Effect

Dividend Effect dividend growth - 4% annually Year            Dividend   1                              $5.50   2                              $5.72   5                              $6.43 10                              $7.83 12    $8.47

Effect of Increasing Dividends Year      Price (8%)    Dividend (4%)   Yield on Cost   1        $10.00     0.25 2.50 %   5           $14.64     0.30 3.04 %  10          $21.59     0.37 3.70 %  25        $68.48     0.66                6.66 %

Hawaiian Electric (HE)

HE, no DRIP

HE, DRIP

HE Chart

HE Long Term

Dividends & Capital Growth 1952, farmer retired with $100,000 Invested in CSBs 1983 son “What if BMO in 52” BMO, 3400 shares in 1952 1983, with splits 17,000 shares worth $456,875 Ignoring Dividends of $410,993

Dividends & Capital Growth Barron’s Article April 1999 $100 invested in S&P 500 in 1925 1999 would be $9,600 With DRIP  $235,000

Dividend Growth

BMO no DRIP

BMO with DRIP

BMO with  DRIP+$50/mth OCP

BCE  no DRIP

BCE with DRIP

BCE with DRIP Today

BCE DRIP with $50/mth OCP

XOM  no DRIP

XOM with DRIP

Cemil Otar’s DRIP

Cemil’ DRIP Summary

The 5% DRIP Advantage Some cos offer a 5% discount on DRIPs and OCP netstockdirect.com-115 US cos Canadian Companies MDS & W (5% on DRIPS) TD (2.5% on DRIPs) TA (5% on DRIPs & OCP)

Cdn Cos Paying Dividends Shrinking 1981 - 100 cos 1991 - 80 cos 2000 - 60 cos 2001 - 57 cos

US Cos Paying Dividends Over 1,600 cos with DRIPs 40% have DSPs 60%, one share registered in your name

DRIP Advantages Can invest small or large  amount Compounding dividend increases Stock price appreciation Dollar Cost Averaging (OCP) Basically Fee Free (50% of US co) Stable Shareholder Base Inexpensive Source of Equity $$$

Dollar Cost Averaging Fixed $$ amount each wk/mth/qtr Yields average entry price over a longer period

DRIP Disadvantages Can be Cancelled by Company Inability to Time Market Minimum OCP Amounts Fees are Increasing (US) Dividends are Taxable Tracking Adjusted Cost Base

Getting Started Most difficult to do-INERTIA Once begun-ADDICTIVE

Methods Direct Investing Single Shares Stockbrokers (Discount) Synthetic DRIPs On-Line Synthetic DRIPS

Direct Investing 600+US cos and 280 foreign cos www.netstockdirect.com No Canadian companies Print Enrollment Form (Internet) Complete and Mail Cheque “Drawn From US Bank” AFL, AXP, PFE, PG, XOM

Single Share Most Plans, One Share to Enroll Buy from a Friend Deregistered from their name Registered to your name Buy as Group of Five Transfer registration to individuals

Adjusted Cost Base

Stockbrokers Buy Shares Through Broker Pay Commission $28.95 Have Shares Registered to Your Name - $30.00 Fee Shares Arrive, Contact TA  Request Drip & SPP Enroll Forms Complete & Return

Synthetic DRIP Offered by Brokerage Firms Selected Shares Only (check) Only Whole Shares (no partial) TOC quarterly $0.175 TOC $52 requires 298 shares Additional Purchase = Commission

On-Line Synthetic DRIPs Sharebuider Buy Shares in Fixed $$ Amount Weekly or Monthly Partial Shares Allowed Selection of 4,000 cos $US4/Trade Canadians Not Eligible NAFTA

How Many Companies? Six to Twelve companies selected from different Sectors Buy “QUALITY” Twelve + is best Canadian Holdings AL, BCE, BNS, DFS, MDS, TA US Holdings ABT, AXP, JNJ, KO, PFE, XOM

What & When to Buy When $$$ are available Invest in your “poorest performer” Buy Low - Sell High

In Summary Frictional Costs DRIP Power of Dividends Efficiency Simplicity Getting Started