DRiPs - Paperwork and Taxes

This is the fourth installment of my series on DRiP investing.

Paperwork

One of the disadvantages of DRiP is that, for each company that you drip, you will receive regular account statements in the mail. The frequency depends on the activity (purchases and dividend paid), but you should expect at least a few every years.

Even though some of the companies you drip may be handled by the same transfer agent, statements will be sent independently for each companies. So if you have 4 companies for which you makes purchases each month, you will receive 4 statements every month, for a total of 48 statements for the year. That's a lot of paper!

Still, it is important to keep those statements, since they report of each purchase you made, dividend you received, and price paid for additional shares of the company. You need that information to be able to calculate you Adjusted Cost Base (ACB), a very important number when you are ready to sell shares (or if you transfer shares to someone else). More on this in a future installment.

Taxes

The dividends you receive from the companies you drip must be reported, even though you decided to reinvest them. At tax time, the companies will send you a slip for that income. If the amount is below a certain treshold, they might decide not to send one to you. You are still supposed to report the income, though.

In Canada, dividends are treated favourably by the tax-man. Although the amount of dividend is grossed up, there is a substancial tax credit also applied. The end result is that if you taxable income for the year is below a certain number (about $40K-$50K, check with your accountant), the dividends you received will actually lower your taxes! Nice, isn't it?

A note, however, about income thrusts (such as real estate income thrusts, REITs). Most of the distributions from income thrusts are not dividends. They are reported on the tax slip as part capital gain (which must be used to readjust your ACB but have no impact on taxes until you sell), part as interest income. Interest income is taxed as regular income, based on your tax bracket.

DRiPs - Enrollment and Purchases

This is the third installment of my series on DRiP investing.

Enrolling Into the Plan

Now that you have the shares registered directly to your name, you can enroll into the DRiP and SPP of the company. This is done by simply filling in a DRiP Authorization Form, issued by the company, and returning it to the transfer agent. Sometimes, you will receive this form automatically when you become the direct owner of the shares. You can also call the transfer agent of the company and ask for the form to be sent to you.

Some of the plans offer a number of different options. You will want the option that allows you to automatically reinvest your dividends into more shares of the company, and that allows you to make additional purchases (i.e. participate in the share purchase plan).

Making Additional Purchases

If the company offers a SPP, you will then be allowed to make additional purchases. This is done by simply sending a cheque to the transfer agent, along with the Optional Cash Purchase form. When the next purchase date is reached, your money will be used to purchase additional shares of the company.

Those purchases are done at specific, pre-determined dates, as specified in the plan brochure. This is usually at the payment date of the next dividend, but some companies allow you to invest monthly. When the transfer agent receives your cheque, they may cash it in immediately, but they will wait until the next purchase date before investing it.

The price of the shares is usually determined by the average of all shares bought during a specified period before the purchase date (5 days is common, although I have seen longer periods).

DRiPs - Registering Shares to Your Name

This is the second installment of my series on DRiP investing.

Registering Shares to Your Name

To participate in a company's DRiP, your shares of that company must be registered to your name. What does this mean?

When we purchase shares through a broker, our broker buys the shares and keep them for us, simply making an entry into their books (more likely a database) that X of those shares belong to you. As a result, the company does not know that you own those shares.

To enroll into the company's DRiP, the company must know about you. So, only shares registered to your name will do. If you already have shares that you purchased through your broker, you simply have to call your broker and ask for the shares to be registered directly to you. Your broker will charge you a fee for this (usually in the range of $30 to $50). Once this is done, your shares will no longer appear in your account at the broker, and you will receive a paper certificate showing your ownership of those shares.

Important Note: The certificate is valuable, since it is the proof of your ownership of the shares. You should keep it somewhere safe, like in your bank's safety box.

Once the shares are registered to your name, you will now appear as one of the owners in the books of the company. As such, you will be allowed to enroll in its DRiP and SPP.

There are ways to purchase shares of the company without going through a broker, and which are less expensive. I will address this in a future installement of the series, once all the basic features of dripping have been covered.

DRiPs - What are they?

One of my favourite ways to invest money for the long term is through my DRiP portfolio. So I thought I would present a series on DRiP investing. This is the first installment.

What are DRiPs?

DRiP is the acronym for "Dividend and Reinvestment Plan". A DRiP is a plan offered by some companies to allow their shareowners to easily re-invest the dividend they receive into more shares of that company, without paying additional fees.

Under such a plan, whenever the company would pays out a dividend, instead of sending you a check for the dividend, it uses that amount to buy additional shares for you. The kicker is that this amount can purchase fractional shares. Those fractional shares, in turn, will also pay out a dividend to you on the next distribution date. This means that you gain the full benefits of compounding. The vast majority of companies that offer a DRiP will reinvest you dividends without charging any fee.

It gets even better. Many companies also offer an additional feature, called a "Share Purchase Plan" (SPP). Under the SPP, you can send additional money to the company to purchase additional shares, without paying any fee. You read that right: invest money without paying fees!

There are some drawbacks to this, though:

• The shares must be registered to your name. This takes time, and carries some costs.
• The purchases of additional shares is done at a preset date, so you cannot time the market closely.
• DRiPs generate a lot of paperwork, and you have to track each purchase.
• Selling shares in a DRiP takes time.

I will come back to each of those in the next installments of the series.

Net Worth Update

As of December 1st, my net worth was $46 360 (down 0.5% from $46 579). The stock market was choppy and though this month, but started to recover at the end.

If I exclude house-related assets and liabilities, my net worth is $37 231 (down 0.4% from $37 367).

Assets ($124 334, down 0.3% from $124 747)

• Bank Accounts $3 622 (down 3.3% from $3 747)
• Emergency Funds $2 556 (down 32% from $3 747)
• RRSP Accounts $31 306 (down 2.2% from $31 999)
• Non-Registered Investments $5 632 (up 24% from $4 542)
• Home $75 600 (stable)
• Arbitrage $5 000 (stable)

Liabilities ($77 975, down 0.25% from $78 168)

• Credit Cards $6 362 (up 3% from $6 171)
• Student Loan $2 665 (down 8.5% from $2 911)
• Mortgage $56 680 (down 0.2% from $56 785)
• Heat Pump Loan $7 151 (down 0.7% from $7 198)
• Arbitrage $4 895 (down 2.1% from $5 000)

This month, I did about half of my Christmas shopping, and refilled the oil tank for the house. These expenses went on the credit cards. Some money from the emergency funds was used for a temporary purchase in the non-registered investments -- it will be back in the emergency fund in December. I put about $1000 in the RRSP this month, at that wasn't enough to compensate completely for the down markets. Choppy indeed!