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The benefits of DRiPing!

DRiP

DRiP stands for Dividend Re-investment Plan. It’s a powerful investment strategy as it allows you to leverage two investment principals: ‘Compound Growth‘ & ‘Dollar Cost Averaging‘.

It is usually associated with Stock, ETFs and Mutual Funds as they can all pay dividends and it can be re-invested at the market price. Many discount brokers support DRiP without any transaction fees. Contact your discount brokers for more details. Some discount brokers go a step forward and provide the Dividend Re-Investment Plan discounts offered by the companies. See the Canadian DRiP List for details on the available discounts in my resources page. The discount can provide an added benefit to the Dollar Cost Averaging.

Compound Growth

This powerful concept refers to how your money can grow faster. Basically, any return on investment from year to year is included to calculate your return on investment for the following year. The principal can also be applied monthly or quarterly. Interest in a bank account provides the compound growth but since the banks practically don’t pay interest, it doesn’t really go anywhere.
Here is a table representing 3 years of hypothetical investments. I have selected RioCan (REI.UN) and an equivalent interest investment.
  • RioCan pays $0.115 cents monthly in dividend for a yield of 7.26% and it compounds monthly.
  • 7.26% interest paid annually and compounded annually. (This is hardly impossible to find at the moment.)
Each investments start with $5000. RioCan was bought at $19 and we’ll assume that price for all dividend to simplify the exercise.

SharesDiv.REI.UN7.26%
1/10/2010263$30.25$5030.25
2/10/2010265$30.43$5060.67
3/10/2010266$30.61$5091.29
4/10/2010268$30.80$5122.08
5/10/2010269$30.98$5153.07
6/10/2010271$31.17$5184.24
7/10/2010273$31.36$5215.6
8/10/2010274$31.55$5247.15
9/10/2010276$31.74$5278.89
10/10/2010278$31.93$5310.82
11/10/2010279$32.13$5342.95
12/10/2010281$32.32$5375.27$5,363.00
1/11/2010283$32.52$5407.79
2/11/2010284$32.71$5440.5
3/11/2010286$32.91$5473.41
4/11/2010288$33.11$5506.52
5/11/2010290$33.31$5539.83
6/11/2010291$33.51$5573.34
7/11/2010293$33.72$5607.06
8/11/2010295$33.92$5640.98
9/11/2010297$34.12$5675.1
10/11/2010299$34.33$5709.43
11/11/2010300$34.54$5743.97
12/11/2010302$34.75$5778.72$5752.35
1/12/2010304$34.96$5813.68
2/12/2010306$35.17$5848.85
3/12/2010308$35.38$5884.23
4/12/2010310$35.60$5919.83
5/12/2010311$35.81$5955.64
6/12/2010313$36.03$5991.67
7/12/2010315$36.25$6027.92
8/12/2010317$36.47$6064.38
9/12/2010319$36.69$6101.07
10/12/2010321$36.91$6137.98
11/12/2010323$37.13$6175.11
12/12/2010325$37.36$6212.47$6169.97
You can see that RioCan is ahead. That’s because the investment compounded monthly where as the other 7.26% investment compounded annually. In this exercise, the price of the shares along with the dividends have stayed constant. In reality, a good solid company will tend to increase their dividends over time which increases your ROI (Return On Investment).

Dollar Cost Averaging

This concept allows you to average your cost throughout the markets. There are always up and downs and being able to do Dollar Cost Averaging, you can mitigate your cost. Mutual Funds leverage this concept by allowing investors to buy funds for small amounts at a time thus allowing investors to buy regularly and averaging their price on a weekly, bi-weekly or monthly basis. This concept can also be leverage with DRiPing. If you have Stock or ETFs, the dividends are either paid monthly or quaterly, if you re-invest your dividend, you can average your price on a monthly or quaterly basis.

In the table above, you can see that every month, the shares bought from the dividend contribute to averaging your price. At any point, you can average your price by buying more shares but this way is automated. Buying regularly allows you to leverage the down times in the market and not just buy when it’s going up.

Slowly and steadily, these principals will add to your bottom line and it can be done without taking risks.
Enjoy applying these concepts!

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2 Responses to "The benefits of DRiPing!"

  1. Ian says:

    What are the tax implications for DRiP investing? Let’s say you earn a high income (for easy math let’s go with $100k a year) and you purchase $5k in dividend producing stocks in a non registered account. You are taxed on the dividends as income. Does DRiP investing provide for some way to get aroundthis?

  2. daniel says:

    Do you have any spreadsheet that would calculate the future growth based on the initial investment compounded quarterly?

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