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An Introduction to DRPs and SPPs

A Dividend Reinvestment Plan (DRP) is a service offered by companies where dividends are not sent to the investor but are used to buy more shares. A big advantage of DRP plans is that they usually allow for fractional share purchases. So, your $2 dividend can be used to buy 0.2 shares of a $10 stock. For the buy and hold investor, a DRP plan is an easy way to deal with dividends.

Some companies even offer investors an incentive to enroll in their DRPs by providing a discount (often 5%) in the cost of shares when the dividends are reinvested.

In most plans, when you wish to sell your shares, all you have to do is ask for a share certificate from the company. The certificate can then be sent to any registered broker for sale. In addition, the company will usually give you cash for any fractional shares at the next dividend date.

Sounds too good to be true? Well, there are a few draw backs to DRPs. In Canada, to enroll in a DRP plan, you need to have at least one registered share (some companies require more). To get this share you'll have to buy through a broker and then pay an additional fee to register the share. The combination of commission plus registration fee is usually between $50 and $100 (depending on the broker).

Share Purchase Plans (SPPs) are closely related to Dividend Reinvestment Plans. You enroll in a SPP in the same way (and often at the same time) as a DRP. With a SPP, you can send the company additional money which will be used to purchase more shares on set dates. These set dates usually coincide with dividend payment dates. As with DRPs, SPPs are usually provided at no cost to the investor. As a result, with SPPs you can avoid additional commission charges when buying more shares. The down side is that you can only make purchases on certain dates and you'll still have to sell through a broker.

I have just provided a very vanilla view of DRIPs and SPPs. As previously mentioned the details of plans vary and a careful reading of the plan details is advised.

Personally I've found that these plans are a good way to get into the market. Primarily, it is difficult for the small investor to make money in the markets given the fees charged by brokers (even discount brokers). Many times SPPs require only one share and then you can buy as many as you want later on. As well, DRPs avoid the mess of having to deal with small dividend payments, and the 5% discount offered by some is quite pleasant. On the other hand, keeping track of all the dividend purchases can be a bit of a pain when it comes to tax time.

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Disclaimers: Consult with a qualified investment adviser before trading. Past performance is a poor indicator of future performance. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, investment advice or recommendations. The information on this site is in no way guaranteed for completeness, accuracy or in any other way. More...