Dividend reinvestment is one of the most powerful concepts in finance and investing. It allows for the concept of compoundingto do its work. A question I received recently from a reader (thanks Tim) concerning dividend reinvestment looked like this:
“I am in Canada and have been looking for brokers that allow dividend reinvestment. I am not interesting is using a DRIP just because of the time factor. Any suggestions?”
First off, I have used DRIPs in the past and stopped using because of the time factor. They are a powerful tool because you can buy shares and get dividend reinvestment for minimal fees, but it did take a lot of organizing and work to invest in them. I do not want to convince anyone not to use them because they are very powerful. It was a personal choice I made, similar to the one Tim is making above. I moved my money to the CSA, which I will talk about in a moment.
There was a good post done by Million Dollar Journey that provided a comparison of some Canadian discount brokers. In his table, he showed which of the brokers provided a DRIP program. Before I provide my suggestions for brokers, I need to explain these types of pseudo-DRIP programs, because they are not the same as a normal DRIP program.
Pseudo-DRIPs are dividend reinvestment options that are typically provided by the large discount brokerage companies and they allow people who hold dividend paying stocks in their account to sign-up for the ability to reinvest the dividends from their holdings into more shares of the same company. Sounds good right! However, the problem is that these pseudo-DRIP programs typically only allow dividend reinvestment to occur if the dividend received is enough to buy one whole share or more. In other words, they do not allow for fractional shares (i.e. 23.456 shares) in the account. That is the biggest downfall of these pseudo-DRIPS and what makes traditional DRIPs much better alternatives. These fractional shares can add up over time to some nice returns. So with that in mind, what are the options for investors who are looking for dividend reinvestment.
If dividend reinvestment is very important to you, and you do not generate enough in dividends yet to buy whole shares of most dividend stocks, then my suggestion is the Canadian Shareowner’s Associations investment account. Their key benefit is they allow investors to hold fractional shares. The downside is they have a limited universe of stocks to choose from (they pre-screen stocks). This alone makes it not for everyone. However, I have found that many of the stocks dividend investors typically look for are on the list. I also hold a eTrade Canada account that I will use for other stocks or investments not available through the CSA.
The only other option for investors in Canada is with brokers such as eTrade or the big banks. Again, be sure to check out Million Dollar Journey’s table of Canadian brokers. My suggestion – go for the cheapest broker because they all tend to provide the same services.
One thing the U.S. kicks Canada’s butt in is with discount brokers. There is just more of a market and more competition in The States, and it shows in the broker selection available. There is a site available that is one of the most comprehensive listing of discount brokers, with services and comments on pretty much everyone of them. The webmasters of this site have also created a page specifically focused on brokers that allow dividend reinvestment.
There are other options available however, away from the traditional brokers. The first is with FolioFn. FolioFn is a unique concept allowing investors to buy one security or a basked of securities, called a Folio. Their key advantage is that they allow investors to hold fractional shares. I have never used FolioFn.
The second option I found for dividend reinvestors is ShareBuilder. ShareBuilder has just been acquired by ING. They focus on the concept of automated investing. For example, if you are Procter & Gamble investor, you can direct $50 every month to dollar cost average into PG. Again, I have never used Sharebuilder but they seem like a good alternative.
If any of my readers have other suggestions for Tim, I encourage you to use the comments to let us all know. Have you used ShareBuilder or FolioFN? What other options are out there for both Canadian and US investors. I would love to hear from you.Google+