Dividend reinvestment plan

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A dividend reinvestment plan or DRIP is a mechanism where dividends paid out by a security are automatically used to purchase new units or fractional units of the same security.

Mutual fund DRIPs typically allow the addition of fractional shares. Exchange-traded fund (ETF) DRIPs typically do not allow the purchase of fractional shares, accumulating instead until accrued dividends are large enough to purchase a whole share, which can lead to a "cash drag" on returns.

The remainder of this page currently relates to one specific type of DRIP, those managed through a transfer agent and dealing with individual companies or closed-ended funds.

Individual company or closed ended fund DRIPs

Some companies allow investors to automatically reinvest their cash dividends by purchasing shares including fractional shares on the dividend payable date, without paying brokerage commissions.

Dividend reinvestment plans are operated directly by the company (or their agent) and therefore there can be differences is how each company's DRIP operates. For example, some companies offer a discount incentive, typically about 5%, in their dividend reinvestment plan. Companies may also offer their DRIP members the ability to make additional cash purchases, also known as a Systematic investment plan (or alternatively Share Purchase Plan).

Synthetic DRIPs may be offered by stock brokers in a limited number of stocks. Cash dividends from a stock in a synthetic DRIP are re-invested to the nearest whole share in that stock and the remaining cash credited to the investor's account. No commission is charged.

This page deals with the process of setting up true DRIPs.

Advantages and disadvantages of a DRIP

Advantages of a DRIP versus purchasing shares via a brokerage include:

  • no brokerage commissions to purchase more stock via Optional Cash Purchase (OCP) plan;
  • automatic dividend reinvestment;
  • fractional share ownership;
  • discounted share purchase price (typically 1-5%).

Disadvantages of a DRIP versus purchasing shares via a brokerage include:

  • relatively small number of companies offering DRIPs (lack of diversity);
  • not all companies offering DRIPs offer OCPs (additional shares would have to be purchased via a broker, negating one of the benefits of a true DRIP);
  • OCPs not processed daily; most are monthly or quarterly (may result in purchases at an unfavorable time);
  • complexity of obtaining an initial share;
  • for a taxable account, an order of magnitude increase in the number of transactions to be tracked for the adjusted cost base (ACB), plus extra attention to be paid if a partial sale triggers a superficial loss.

Canadian DRIP share transfer process

The sections below address one disadvantage of true DRIPS - complexity of obtaining an initial share. The process of obtaining the initial share via direct transfer, using the two largest transfer agents, is explained in detail and has been used to successfully transfer shares between investors.

To remain an active DRIP investor requires owning a non-zero number of shares in a company. This number could be "less than 1" if fractional shares have been credited to the holder's account as part of a dividend reinvestment. (discussion on DRIP investing board)

Methods of obtaining a DRIP share

In order to participate in a company dividend reinvestment plan (DRIP), one must obtain a share in a company offering a DRIP. This can be done by buying a share through a brokerage or by finding another DRIP shareholder who is willing to transfer a share.

Buying a share from a brokerage

The total cost of obtaining the share from a brokerage be quite high. Assuming an investor has access to a brokerage account, below certain account size thresholds, trading commissions cost as much as $29.

A $20 share plus the $29 trading commission, plus the $50 certificate fee would result in a total cost to obtain the share of $99, for a $20 share, a premium of $79.

Direct share transfer

Many DRIP investors choose to participate in share exchanges - transferring extra shares between each other - to avoid the costs involved in the brokerage approach of obtaining shares.

Buying a share from another investor with an existing DRIP, a $10 gratuity is typically added to the share price. A $20 share would therefore cost the new owner (transferee) $30, a premium of $10.

The sections below detail the process of direct share transfers.

Steps in transferring DRIP shares between investors

The transfer agent requires the following to process a share transfer:

  • a completed & signature guaranteed share transfer form (linked below)
  • a completed letter of instruction (blank templates linked below)
  • a share certificate OR instructions to transfer from the Dividend Reinvestment plan balance

In order to fill out the above forms, the following information is required:

  • the name and address of the person you are transferring to (the "transferee")
  • the certificate number of the share you are transferring OR the account number of the Dividend Reinvestment plan if transferring from that balance
  • your personal information exactly as it appears on file/on certificate (name & mailing address)
  • a piece of personal ID with your signature in order to have all documents signature guaranteed

The process for assembling the above documents differs slightly between Computershare and Canadian Stock Transfer Co. The specifics of each are posted below with direct links to the pages required to complete the process.

Specifics of each transfer agent

Computershare

Computershare's interactive help page is here: Shareholder Services (Enable browser cookies to view)

Computershare has an interactive agent called "Penny" to guide transferees through the share transfer process.

Declaration of ownership form

From the "Ask Penny" interactive assistant: There are companies for which a Declaration of Ownership is required. To determine if your company requires a Declaration, please refer to our Downloadable Forms section.

While the interactive assistant does not specify who should fill out this form, email responses from Computershare customer service indicate some companies require this form to be filled out and sent in with the transfer paperwork. This would require the new owner to fill out the paperwork and send it to the original owner for inclusion in the transfer documents.

Other correspondence with Computershare indicates that for small numbers of shares, the form is not required. While that threshold has been specified, discussion on the DRIP information discussion forum suggest it to be quite high, in the range of 10% of the outstanding shares of the company.

One company, National Bank, requires that the form be signature guaranteed (see the section on signature guarantees below) and sent with the transfer documents, regardless of the number of shares.

Computershare securities transfer form

The direct share transfer form is here: Securities Transfer Form, with instructions on page 2.

The Computershare website should always be referred to for the most up to date, valid securities transfer form. However, a fillable PDF version has been developed and is available for direct download, here: Computer Securities Transfer form, fillable PDF

Mailing addresses

Their mailing address is listed in the same section:

Computershare Investor Services

Attn: Stock Transfer Services
100 University Avenue, 9th floor

Toronto, ON M5J 2Y1

Canadian Stock Transfer Company

CST's web-based form to generate Securities Transfer Form
Sample of CST's PDF Securities Transfer Form generated by the web-based form above

Canadian Stock Transfer Company (CST) has a page to guide you through transfers, here: Basic Transfers

Clicking on the "Securities transfer form for shares and warrants" link opens a form page that generates a pre-filled PDF file for print with a guide for entering correct information.

CST's mailing addresses are linked on the sidebar of the above page:

By Mail

Canadian Stock Transfer Company

P.O. Box 700, Station B

Montreal QC H3B 3K3

By Courier

Canadian Stock Transfer Company

2001 University Street, Suite 1600

Montreal QC H3A 2A6

-OR-

Canadian Stock Transfer Company

320 Bay St., B1 Level

Toronto ON M5H 4A6

Olympia Trust Company

More information on the the securities transfer process with the Olympia Trust Company can be found on their website, here: http://www.olympiatrust.com/transfer-agent/transferring-securities

A direct link to their securities transfer form is here: http://www.olympiatrust.com/transfer-agent/pdf/Security-Transfers.pdf

In an email response from Olympia Trust Company on 6 July 2012, they indicated that securities transfers should be accompanied by a Letter of Instruction.

Further, as share certificate issuance via Olympia has a fee associated with it, transfers could be made requesting only a dividend reinvestment plan balance transfer, with no new certificate issued. This should be specified in the Letter of Instruction.

Letters of instruction

Blank "Letter of Instruction" templates as suggested by Computershare's interactive helper, Penny, are posted here:

Signature guarantees

Samples of signature guarantees, from page two of the Computershare securities transfer form.

Regarding the Signature Guarantee:

  • Visit a Canadian Schedule I charter bank indicating a requirement to have securities transfer forms signature guaranteed.
  • CAUTION: Signature Guarantees from CIBC may not be accepted by transfer agents[1]; avoid the risk and use another institution. (TD Canada Trust is known to be acceptable)
  • Ensure the bank witnesses signatures on all documents, dating, stamping, numbering, and signing in the area reserved for the signature guarantee. (a sample is provided on the back of the Computershare transfer form; print it on the back of the form for reference by the bank employee)
  • This process has been done by those who are not a bank customer but being a client of the signing bank may avoid objections by less-than-knowledgeable staff.

On completing and signature guaranteeing the required documents, mail them to the appropriate transfer agent at the addresses listed above. Processing can take several weeks during which time transferee and transferor should stay in contact and confirm the receipt by the transferee of the new share certificate.

Post transfer

First shares with a particular transfer agent

Receiving shares is significantly less laborious and time consuming than sending them.

If an owner has used the above-documented transfer process, the transfer agent will mail the new certificate directly to the new owner. With the certificate information (issuing company, certificate/account number, registered name and address) the new owner can register for an account on the transfer agent's web site where their security will be listed.

Canadian Stock Transfer Company's "AnswerLine" online account registration page is here: https://www.canstockta.com/WbisRegWeb/AnswerLineRegDisplay.do

Computershare's "Investor Center" online account registration page for Canadian residents is here: https://www-us.computershare.com/investor/registration.asp?cc=CA&lang=en&context=DataEnvironment=LIVE%7CServerRegion=Americas%7CRegSystemEnvironment=LIVE%7CServerMode=LIVE%7CServerUse=INTERNET

It is important to sign up with same information the securities are registered under (exact spelling of name and address, exact certificate/account number) to ensure the account is correctly linked with securities held.

Existing accounts with transfer agents

If a transferee already has an account with a transfer agent, share information will most likely be added to the transferee's portfolio information online prior to the physical share certificate arriving in the mail.

Transfer processing times

Typically, Canadian Stock Transfer Company processes transactions more slowly than Computershare. On receipt of paperwork, the former can take several weeks to process a simple share transfer where Computershare may only take a week once the paperwork is received. Canada Post or courier transit times must be taken into account as well.

Canadian Stock Transfer share issuance process

Canadian Stock Transfer Company, after receiving properly filled and endorsed securities transfer paperwork, has been known to:

  1. debit a share from the original owner's account
  2. create a new share certificate, placing it in the original owner's certificated share balance
  3. remove or cancel the certificated share and mail the new share to the transferee

The above seems convoluted but has been verified by several members of the DRIP Investing Resource Centre forum[2] and the end result is a successful transfer to the new owner.

See also

References

  1. post by awesomeness on DIRC Canadian DRiPs Message Boards, CIBC Signature Guarantees
  2. post by CJOttawa on DIRC Share Exchange Message Boards, Positive Feedback for Renee

External links

Canadian DRIPs

US DRIPs