For readers who don't know about dividends, they are simply profits that a company earns which are given to shareholders.  This is not the case in many smaller growing companies because they tend to take the profits and reinvest in the company to make it grow.  However in many large stable companies, such as the five big banks in Canada, dividends are normal and even expected by shareholders.  At the time of writing this article, March 15 2008, it is not uncommon for dividends to be worth 6%, annually, of the common share price of a Canadian bank.  For example if you owned a share worth 10 dollars and it paid an annual dividend worth six percent of the share price you could expect to recieve 60 cents per year from each share of the company that you owned.  This is largely due to depressed share prices at this time.  Nevertheless try shopping for a 6% GIC in Canada right now and I am sure that you wont find one.  That is not to say that dividends will continue and increase in value during the future of the company for eternity.  At times of decreased earnings and economic difficulty a company can decide to decrease a dividend or even temporairly suspend it until the company regains its footing.  However the Bank of Nova Scotia proudly proclaims that they issued their first dividend on July 1, 1833 and that payments have continued ever since.

What you do with the dividend is up to you.  You can keep it in an account and let it accumulate or you can reinvest and buy more shares.  The latter of the two is what this article is all about.  Dividends are issued, generally, each quarter and thus reinvesting them results in purchasing the shares at varying prices and so dollar cost averages your investment.  In addition many DRIPs do not charge a brokerage fee and others that do usually charge a small fraction of the administration fee that a broker would.   Additionally companies sometimes offer shares at a discount to market prices if you participate in their plan.

In addition to drips many companies offer stock purchase plans (SPPs) which allow an investors bank account to automatically be debited to purchase more shares at a specified interval, ie. monthly, quarterly.  There is often a maximum that an investor is allowed to purchase via this method.  However savings on brokerage fees can often be substantial by participating in the plan.  The benefits of DRIPs become apparent for both large and small investors alike because many plans allow you to puchase fractional shares to ensure that all of your dividends are being reinvested and not sitting idle in an investment account.

There is an interesting calculator on the Kellogs website that allows you to pick a date in the past which you could have purchased shares and the implications of reinvesting dividends as opposed to collecting them.  I choose to purchase 500 shares on march 15th 1988, which would have cost me $25 250 dollars, the present value of that investment had i choose not to reinvest divdends would be $106,300, or expressed as a percentage would have grown by 320.99%.  However, had I reinvested the dividends the present value would be $178,583.32, or grown 607.26%.  Thats a difference of approximatley $72,200 over twenty years.

Now the process involved in registering for a DRIP can vary from company to company however you first must own at least one share in your own name, be sure you talk to your broker to ensure this is the case.  Each DRIP you enroll in will require you to fill out forms corresponding to their program, some may allow you to do this online while others may require that you mail in the forms.  Additionally, there may be more forms to fill out if you are considering enrolling in a company's SPP.

---