Dividend Digger

Compound interest is the eighth wonder of the world. He who understands it, earns it . He who doesn't, pays it.

My Approach

My Approach

Do you remember those late night infomercials of that mini rotisserie oven where everyone in the audience where shouting “set it and forget it”


 
In essence that is exactly how I approach dividend growth investing.

For those of you who are not aware of the concept of “set it and forget it” What I am referring to is utilizing a DRIP.

DRIP Stands for:

Dividend

Re

Investment

Plan

 

How does a DRIP work exactly?

Well for starters let’s look at 2 different forms of DRIPs.

1. Traditional: Offered by the company and Administrated by a transfer agent

2. Synthetic: Offered by your Broker and administrated by them

The difference:

With a traditional DRIP you have access to a SPP/share purchase plan (ability to purchase shares without commission fees) and can buy fractional shares with your dividends. It is good way for someone with low capital to enter into the stock market and obtain confidence. However, there is a catch. To enroll in a Traditional DRIP plan it can be a lengthy and complicated process. For the purpose of my blog and keeping things simple I will just leave it at that, if you want to pursue a Tradition DRIP method there are many other sources online that will do a better job explaining how to enroll in a traditional DRIP than I ever could. . The process to enroll in a synthetic DRIP is very easy as well, you simply just phone your broker and you tell them you want to be enrolled in a Synthetic DRIP

With a Synthetic DRIP you still have your dividends reinvested but the catch is your broker will not buy fractional shares. This means you would have to have enough dividends coming in every payment to cover the cost of another share.

Confused?

 

 

Let me break it down.

Say for example you wanted to invest in a company like Toronto Dominion Bank (TD) and enrolled in a Synthetic DRIP.

Assuming you did your research you know that one share of TD pay a dividend of $1.88 a year in quarterly payments.

That means every 3 months (1/4 of year) they pay a dividend of $.47

From here you will need to calculate how many shares you will need in order to receive a dividend payment of whatever the share is currently valued at.

To calculate how many shares to DRIP is simple.

You find out the cost of one 1 share of the company and you dividend it by the payment which in our case is $.47.

Currently the cost to purchase one share of TD is 56$

So in order to enroll in the DRIP with TD you simply divided $56/$.46

Leaving you with 121.7 shares.

However you cannot buy fractional shares so you will need to buy 122.

But wait, there is still one more thing to take into consideration. The price of the stock will fluctuate through the year so what I do is I buy extra shares on top of that to compensate for any capital gains on my stock so I can keep utilizing the DRIP. Any excess money left over after purchasing a share is just cash in your account.

 

So I guess you’re probably wondering now why I am trying to associate something like a DRIP to a rotisserie oven.

Well it all comes down to that saying “set it and forget it”

The key component to what make that oven so enticing was that it allowed you to be worry free once you placed your food inside it to cook, knowing you will not need to constantly check on it and change settings. The way I look at it, it’s low stressing cooking.

Much like a setting up a DRIP there isn’t really much more you need to do. If you’re a long term investor once you set up the DRIP all you need to do is let the power of compounding interest take action and watch your wealth slowly grow. Sure you’ll want to tweak it every now and then to ensure you are still DRIPPING but other than that you can simply “SET IT, AND FORGET IT”. Granted you are invested in “the best of the best” it truly is low stress investing.

 

 

 

Disclaimer:
I am not a licensed or profession investment adviser. I do not recommend you to buy or sell any of the stocks I purchase or mention. Please remember to exercise caution when purchasing any securities. The intent of this website is to solely share my journey towards a greater wealth, I will not be held accountable for losses suffered by any party.

2 Comments

  1. Hi.. I think the example of your DRIPS is abit wrong. u get paid $0.47 dividend and to purchase the TD which the share price is $56. it should be $0.47/$56. u are only allow to buy 0.00839 fractional shares. =)

    • Ace

      November 8, 2014 at 8:11 pm

      Hey holypendant,

      Thanks for the comment and I appreciate the feedback! The reason why I chose to dividend 56$ by $.47 is in the event that your broker does not allow you to purchase fractional shares. All the discount brokerages offered by the banks in Canada do not offer the abilitiy to purchase fractional shares. In order to enroll in any from of synthetic DRIP with them, you must buy enough shares to fully reinvest at least 1 share when the dividends are paid out.

      Hope that helps!

      Ace

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