Dividends


Accumulating dividend income through a DRIP may seem like a slow approach to investing at times.  Sticking to the plan is tough, especially in today’s world where we are constantly bombarded with media and business news.

To help me stay motivated I put together a tangible example of how much dividend income can grow in a few years through a DRIP.

Example of holding 200 shares of BNS through a synthetic drip:

  • 03/30/2007 – 200 shares, $84 income each quarter
  • 06/28/2007 – 201 shares,  $90.45 income each quarter
  • 09/28/2007 – 202 shares, $90.90 income each quarter
  • 12/28/2007 – 203 shares, $95.41 income each quarter
  • 03/28/2008 – 204 shares, $95.88 income each quarter
  • 06/07/2008 – 206 shares, $100.94 income each quarter
  • 10/03/2008 – 208 shares, $101.92 income each quarter
  • 01/02/2009 – 210 shares, $102.90 income each quarter
  • 04/03/2009 – 213 shares, $104.37 income each quarter
  • 07/03/2009 – 216 shares, $105.84 income each quarter
  • 10/02/2009 – 218 shares, $106.82 income each quarter
  • 12/31/2009 – 220 shares, $107.80 income each quarter
  • 04/01/2010 – 222 shares, $108.78 income each quarter
  • 07/02/2010 – 224 shares, $109.76 income each quarter

From this one example we can see how quarterly income increased from $84 to $109.76 (about 30%) in about three and half years.  Not a bad raise for very little effort!  Over this period we would have accumulated $247.18 of cash as well since the synthetic DRIP only purchased whole shares.

The example points out key factors that drive performance in a DRIP:

  • Sticking to the plan even during tough times.  The financial crisis during 2008 and early 2009 impacted the share price, allowing our DRIP to purchase a larger number of shares
  • Selecting companies that consistently pay (and increase dividends).  BNS increased dividends in 2007 and 2008 and continued to pay dividends during the financial crisis

Note that I’ve ignored changes in share price in the example as the purpose is to focus on generating a continuous passive income stream.  The exact numbers from a BNS DRIP may also differ slightly as brokers may require several days to process the dividend payment and share purchase (I simplified the example by using the closing share price on the dividend dates).

Even if you don’t own BNS, I hope seeing tangible numbers from a DRIP example helps other DRIP investors out there stay the course as well!

Disclaimer:  This blog has no professional association with any organizations or companies mentioned in the article.  The contents of the article are the personal opinion of the author at the time the article was posted and may be subject to change.  The blog and author are not responsible, nor will be held liable for any content posted by others in the blog comments.  Readers should complete their own due diligence prior to making any personal decisions.

The introduction of Tax Free Savings Accounts a couple of years ago is one of the best programs to be introduced for Canadian investors in some time.  After all, anything to reduce the amount of taxes we pay is a good thing.  There are numerous online discussions on various strategies for the TFSA: emergency cash savings, RSP alternative, dividend income growth, high-growth speculation, etc.

In the first year I didn’t put much thought into the account and threw the deposit into a high rate savings account.  However, recently inspired by various online dividend growth blogs and Lowell Miller’s “The Single Best Investment”, I’ve decided to establish my TFSA as a dividend income compounding machine.  My plan is to buy consistent dividend payers (or dividend stock ETFs), reinvest the income through synthetic DRIPs and take advantage of my 15 to 20 year time horizon to let compounding do its magic.  To start I’m looking at the following stocks:

  • Emera (EMA)
  • Fortis (FTS)
  • iShares Dow Jones Canada Select Dividend Index Fund (XDV)*

* iShares recent switch to monthly distributions for XDV may impact my decision on this stock as the distributions may not be enough to DRIP a whole share

A big advantage (apart from no tax) of using the TFSA is not having to track the adjusted cost base as dividends are reinvested. Over time, I’m hoping that consistently adding to the account each year and reinvesting the dividends will help me supplement my income ~15 years from now.  We’ll see how it works out.  I’ll post updates from time to time.

What are your thoughts?  Are there any readers out there using a similar strategy for the TFSA?  I’d love suggestions.

Disclaimer:  This blog has no professional association with any organizations or companies mentioned in the article.  The contents of the article are the personal opinion of the author at the time the article was posted and may be subject to change.  The blog and author are not responsible, nor will be held liable for any content posted by others in the blog comments.  Readers should complete their own due diligence prior to making any personal decisions.