Thursday, May 8, 2014

Falling Discount Broker Costs and the Use of DRIPs Can Jumpstart Small Accounts

 Back in the early 2000s when we first started managing our own stock trades using a discount broker, we selected the little company eTRADE, since it was offering the best rate by far at $9.99 per trade compared to $29.99+ for the large banks.  A few years later, Scotiabank purchased eTRADE, keeping the low trade fee for accounts worth at least 50K and rebranded it as iTRADE.  Soon, the other banks lowered their fees to remain competitive and for a while, the fees for the discount brokerage arms of all the major banks were pretty close.  Non-bank brokerages such as Questrade have even lower fees, but for the purpose of this article, let's stick with the big banks. 

This year, in another salvo to win new business, RBC Direct Investing removed the minimum account balance restriction and is now offering $9.95 a trade (note the trivial but symbolic $0.04 competitive difference to iTRADE) for all accounts regardless of size.  BMO InvestorLine and TD Waterhouse quickly followed suit.  It is only a matter of time before Scotiabank and CIBC Investor's Edge will need to fall in line if they don't want to start losing customers, let alone attracting new ones.

This is great news for new investors who are starting to build up their portfolios. Now, you could buy stocks or bonds for as little as $1000 and pay only 1% on the trade.  Of course the more money you can save to make a single purchase, the lower the cost per share will be.

The use of the Dividend Reinvestment Program (DRIP) makes it even easier for small accounts to grow with minimal transaction fees.  If you buy a stock that supports a DRIP, you can enroll to have the dividends from that stock be automatically reinvested into buying more shares, without incurring any trade costs. Some companies even offer a discount on the shares bought within a DRIP in order to reward shareholder loyalty.  Having your dividends reinvested in a DRIP immediately puts to work small sums of cash that otherwise would sit idly in your account–not worth enough to warrant the trade fee, but also not earning any interest or dividends. The DRIP works its compound magic since the more shares you own, the more dividends you generate, so that eventually your DRIP can buy even more shares.  Of course, you want to select a company that you feel comfortable owning more and more shares of.  Luckily, DRIPs are supported by most of the large-cap blue chip companies.  An excellent list of Canadian companies that support the DRIP can be found here.

I just found out today that to qualify for the DRIP purchase, you must receive enough dividends per payout period to cover the cost of at least one share.  I thought that my dividends would be put aside and accumulated until I had saved enough to cover the cost of the share purchase.  This turns out not to be the case.  If I don't have enough dividends to buy a share, the dividends just remain as cash in my account. So for one of my stocks, I hold 160 shares that pay out around $15 per month.  The share price is around $24.8 so I need to purchase an extra 114 shares ($2840 including fees) before I will generate enough dividends per payout period to actually qualify for the DRIP.  This stock is in an RRSP where I can no longer make further contributions, so I will just have to wait until I accumulate enough dividends from the other stock in that account to make my purchase.

Just note that it could take up to one dividend payout period before the request to DRIP or unDRIP a stock to take effect.  So if you decide at some point that you need the dividends as cash again, leave enough time for the unDRIP request to be processed.

1 comment:

  1. Hi Annie, you may have found out by now - you can get fractional shares through a DRIP but you have to register directly with the SPP of the issuing company (which can be a bit of work) . When you do a DRIP through a broker, you run into the whole share issue. There is a lot of info on the web about DRIPs in this manner.