If you are an investor who hates paying commission fees, like I do, then one of the best ways to invest is through a strategy known as dripping. For the purpose of this article we will look at doing so using a discount brokerage. Discount brokerages are third-parties that enable investors to purchase shares, and set up drip accounts. Most major banks have discount brokerages.
Discount brokerages allow you to purchase stocks on your own, relatively inexpensively, as compared to full service brokers, who decide which stocks you buy and when you buy them. This can lead to high commission costs. In this article, I will outline how to enroll in a drip account, and how doing so will help automatically add value to your portfolio.
1. What is a Drip?
Drip stands for dividend reinvestment plan. Some companies that trade on the stock market pay cash dividends to shareholders on a regular basis, usually quarterly, or annually. As an investor, you can deposit these dividends directly into your checking account, and treat them like cash. This is a great passive income strategy, however, dripping exists as an alternative, hassle-free method of dealing with your dividend earnings by automatically re-investing them. By dripping through a discount brokerage, you can accumulate shares automatically, and without commission costs. It should be noted that you can be charged as much as $30 per trade when you buy initial shares in a company
2. How to Start Dripping
Dripping is simple. After you have signed up and set up an account with your discount brokerage, go to the brokerage website and search dividend reinvestment plan. This will take you to the drip page, where you will find a list of eligible securities and companies which have set up a drip for their shareholders.
3. An Example Using a Real Stock
Let’s look at Canadian Utilities Limited (ticker symbol CU on the Toronto Stock Exchange). Currently, Canadian Utilities stock is trading at $33.47, and the annual dividend is $1.07. This means for every share you own in Canadian Utilities stock, you will receive $1.07 in cash each year. A brokerage if they have a drip program will allow you to buy more shares in CU automatically from the cash dividends paid to you by Canadian Utilities without incurring commission costs. The easiest way to do this is by simply calling or emailing the brokerage associate, and asking how you can sign up for the dividend reinvestment program for the company whose shares you are interested in purchasing.
If one share of CU is $33.47 and the dividend payout is $1.07 per year, then you need to buy 32 shares in CU in a year, to generate enough dividend income to automatically buy another share in the company.
32 shares x $33.47 (current CU stock price) = $1,071.04
Dividend income from $1,071.04 = $34.24 (enough to automatically buy another CU share).
4. Sit Back, Relax and Let Your Portfolio Take Care of Itself
Now, if you don’t have much disposable income, $1,070 may sound like a lot, but dripping is a low-risk method of increasing the value of your portfolio, with no maintenance hassle. The idea is to buy stock in a company that has a strong history of paying dividends and has a stable business model. Canadian Utilities has over forty years of increased dividend payments and the services they provide like heat and electricity, are current household necessities. If you find a company that satisfies this criteria, then you can relax and let the dividends continue to buy you more shares in the company of your choice, automatically, every year.