Monday, 24 October 2011

How I Plan to Use DRIPs

Last time I talked a little bit about the pros and cons of using DRIPs in your financial plan. Now I would like to talk about how I plan to implement DRIPs to help me achieve my financial goals. Since my main concern with running a DRIP is the fact that I can't choose when to purchase more shares (it's automatically done for me), I decided that I would have some criteria that would have to be met in order for me to DRIP a stock.

After reading an old post by Michael James, I realized that dollar-cost averaging isn't as amazing as it seemed, so there had to be something else that appealed to me to justify running a DRIP. 

I first started to really learn about DRIPs when I was reading about them over at The Wealthy Canadian and My Own Advisor. I'm going to take a page out of The Wealthy Canadian's book and DRIP only the companies that offer a discount when I set up the reinvestment plan. That will help offset the fact that I'm unable to choose when to buy in.

Once I made that decision, I went over to the Canadian DRIP Primer website and checked to see if any of my holdings offered discounts on their DRIPs.

This is what I found:

CIBC - 2% discount
Corus Entertainment - 2% discount
Just Energy - 2% discount
Sun Life Financial - 2% discount
Artis REIT - 4% discount
Riocan REIT - 3.1% discount

I recently picked up enough shares of SLF.TO to generate one share so that would be enough to start a synthetic DRIP. Unfortunately my positions in the other 5 holdings are not large enough (yet) to run DRIPs on them.

I also discovered that Claymore ETFs offer DRIPs. I plan to set one up for my position in Claymore 1-5 Yr Laddered Government Bond ETF (CLF.TO). This is where I plan to put most of my cash when I'm waiting for buying opportunities to come along. Many people put those funds in money markets or hold them in plain old cash but I feel that ETFs are liquid enough so that I can grab the money when I need it, and if I don't happen to need the funds (because stock prices aren't attractive to me) then it can sit in the ETF accumulating more shares through the DRIP.

My short-term priority is to increase my positions so I can be eligible to DRIP them with my broker. Also, like I said before, I plan to move some of the holdings (i.e. the bond ETF and the REITs) to my TFSA in order to be more tax-efficient.

However, in the long-term, once the amount of dividends I receive is large enough for me to purchase more shares manually, I'm going to turn the DRIPs off. I feel that I can allocate the funds to where stocks are cheap, opposed to buying shares regardless of the market price. The plan is to run a "manual DRIP" and to take only the upside of dollar-cost averaging (which would be to buy more shares when the price is low - so averaging down). The only difference is that instead of applying the plan to individual stock, it's implemented throughout the whole portfolio.

Having those discounts make me feel better with letting these positions run on autopilot for awhile as I focus on other parts of my portfolio.

This plan may be unconventional but if I pay attention, play smart (and safe), and be patient, then this may work.
Wish me luck.

-the Paperboy

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