In Part 1 of the DRIP series, I covered the basics of DRIPs – what they are, advantages/disadvantages and how to track the cost of shares.
- Part 1 – The Basics of DRIPs
- Part 2 – How to Setup a DRIP (below)
- Part 3 – DRIPs with the best discounts
Related: 5 Advantages of Dividend Stocks
Below is a 4-step guide to setting up a DRIP. The process may be time consuming but is actually quite simple.
Here is how it works:
Step 1 – Selecting a Company to DRIP
Find a company that pays a dividend and offers a DRIP.
This is fairly straight forward and like any other type of investment – involves looking at the company’s financials.
You should consider a company’s dividend yield, the history of their dividend payments as well as their current profits and cash flow situation.
Step 2 – Buying a Share
You need to get at least one share of the company you would like to DRIP. This can be done in a few ways.
The most common way is for an individual stock purchase using an online discount broker.
Here are some other ways to get the one required share you need:
- Have a current shareholder who already has a DRIP set up and running request a share certificate transfer to be put in your name. This usually costs around $10
- Share Exchange Board. This is a listing of current shareholders willing to transfer a share to you for a small fee (usually around $10). Click here for a popular board
- DRIP Clubs. Click here to find a local DRIP Club in your area
- Pooled purchase/group buy. This option doesn’t seem too common but involves one person buying a bunch of shares and then (using a transfer agent) individually distributing them to a small group
Step 3 – Request the Stock Certificate
Once you have opened an account with an online discount broker the next step is to request the stock in certificate form. If you already have the share certificate using one of the other methods mentioned above, then you can skip this step.
Most brokers have a form you need to fill out which includes your details (name, address, etc) since the hard-copy share certificate will be going to you. Once the form is filled out the process usually takes 2-3 weeks for the certificate to arrive in the mail.
Note that there will likely be a fee involved in having the share certificate mailed to you and it varies between brokers.
Step 4 – Mail to Transfer Agent
In this step the share certificate information gets mailed to a transfer agent, which is a third-party company that keeps records of shareholders, cancels and issues certificates and manages DRIPs.
There is some paperwork required by the transfer agent that confirms the enrollment in the DRIP, share certificate number, etc.
The actual share itself does not get mailed – it should be retained for safe-keeping.
Along with the paperwork, there is usually the option to purchase additional shares as part of a share purchase plan. In this case a cheque for the amount of the shares should also be enclosed.
Conclusion: the actual process to setup a DRIP is relatively simple but could be costly (fees involved) and time-consuming. However, in the long run it is an attractive option for any investor who is “hands-off” because once it’s set up and running, it operates automatically.
Canadian DRIP Primer is considered the premier source for everything related to DRIP. Click here to find out more