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Using A Synthetic DRIP To Simplify My Portfolio

I plan to put my RRSP on auto-pilot over the next few years as I start to run out of unused contribution room.  One of the first steps to simplify my portfolio was to set up a synthetic DRIP or dividend reinvestment plan.  This process allows you to reinvest your dividends commission free instead of collecting them as cash.

Unlike a regular dividend reinvestment plan, where investors have the ability to purchase partial shares, a synthetic DRIP will not allow you to buy fractional shares in a company.  A traditional DRIP is tricky to set up – it involves buying at least one share in a company and then paying to acquire an actual share certificate (paper form).  Then you fill out a form and send it to the company’s transfer agent to enroll in the DRIP program.

Related: How to set up a DRIP

A synthetic DRIP is a lot less trouble.  I just called TD Direct and asked to have all my stocks enrolled in the DRIP plan.  Not all of my stocks qualify, either because the company does not offer a DRIP program or because I don’t receive enough dividends to purchase at least one whole share.

Here’s how a synthetic DRIP works:

Let’s take Bell Canada (BCE) for example.  I own 80 shares and the company pays a quarterly dividend of $0.6175 per share.  That means each quarter I’ll receive a dividend of $49.40 from Bell.

The stock currently trades at $48.96 so the synthetic DRIP will automatically purchase one full share of BCE and then deposit 44 cents into my cash account.

If the stock price goes over $49.40 then it will no longer qualify for the synthetic DRIP and the dividend will be paid out in cash.

Another stock that qualifies (barely) is Emera (EMA).  It pays a quarterly dividend of $0.3625 per share so 100 shares pays $36.25.   The stock currently trades at $35.47.

Related: Dividend investing – Getting started

In my portfolio, only six stocks currently qualify for the synthetic DRIP program – Bell, Emera, Liquor Stores, Suncor, Telus, and TransCanada Pipelines.

Final thoughts

I like that I can use a synthetic DRIP to slowly add shares at no additional cost.  Eventually I’ll consider setting up the classic DRIP program to take advantage of fractional shares and discounted share purchase plans.

Do you have a DRIP program in place for your dividend stocks?

Weekend Reading: Rob Carrick Hangout Edition

We’ve had some awesome guests lately on the Because Money hangout.  If you’re not familiar with the format, we host a video podcast on Google+ Hangouts on Air every Wednesday night at 7:30pm MST (9:30pm EST). Last week we had Rob Carrick on the show to talk about Generation Y.  We accepted the fact thatContinue Reading