Question about reinvesting dividends

[indexxx]

This might be an obvious question, but if I hold a company that pays dividends in a brokerage like Questrade, and choose the dividend reinvestment option, where does the payout go until I have enough for another share? Allow me to expound a bit:

Clearly, when one purchases the stock in one's own name from the Transfer Agent, then the dividends buy fractional shares. I have a couple of real DRiP/SPPs set up. But what about stocks in a brokerage- QT for example offers a synthetic drip. Say I hold fewer than the number of shares required to purchase another full share when dividends are distributed; let's say when Apple's first dividend is paid, but the number of my holdings don't earn me the $500-$600 to get another share. What happens to that $100 (for example) or so in dividends- I've registered for the DRiP, so is it deposited into my account as cash, or will it accumulate in the brokerage's records until I have enough for a share?

[Spudd]

It's just deposited as cash. You'll never get a share dripped if you don't earn enough dividends in one shot to pay for one.

[Eclectic12]

^^^

+1 ... that is the downside to a synthetic DRIP (i.e. broker DRIP).

The dividends continue being paid as cash until either the share price drops enough to buy a whole share or more shares are purchased.


DRIPs directly through the company will re-invest the dividends to three decimal places.


Cheers

[Sherlock]

Nothing infuriates me more than when my dividend is just a few cents short of buying a share. Happens every once in a while.

[dcaron]

Nothing infuriates me more than when my dividend is just a few cents short of buying a share. Happens every once in a while.

Pardon the dumb question: What happens in that scenario - does your money sit on the sidelines until the next dividend payment occurs a month later, to allow for a "whole" share to be purchased?

[Sherlock]

Your money is just deposited into your account as cash. It does not get used for a share to be purchased, the only way you can drip is if each dividend payment is equal or greater than the price of one whole share.

[Dibs]

You get paid whatever is left in cash.

[Financial Cents]

@indexxx

This is why it is good to buy enough shares of a stock, with some buffer to spare; so if the stock price inches up a bit, you can still get your whole shares purchased with dividends paid.

http://www.myownadvisor.ca/drips/

The flipside is, if the stock price is that high, maybe you don't want your dividends reinvested. You can deploy that cash paid into another stock.

[Eclectic12]

Pardon the dumb question: What happens in that scenario - does your money sit on the sidelines until the next dividend payment occurs a month later, to allow for a "whole" share to be purchased?

Others have answered but just to walk through an example to make sure it is clear:

Stock A pays $0.10 per share and one has 50 shares enrolled in the synthetic DRIP:

Dividend payment 1:
$0.10 x 50 = $5 where the DRIP share purchase price is $7.
This means $5 will be deposited to the account, nothing else happens.

Divident payment 2:
$5 dividends where the DRIP share purchase price is $6.
This means $5 will be deposited to the account, nothing else happens.

Divident payment 3:
$5 dividends where the DRIP share purchase price is $4.
This means $5 will be deposited to the account, $4 will be removed to buy 1 share that is added to the share total (i.e. now 51 shares owned/collecting dividends) and the remainder of $1 stays as cash. Nothing further happens.

In this case, for a taxable account - the investor has to adjust the stock A adjusted cost base (ACB) in their records for the additional share bought at $4.


Divident payment 4:
$5.10 dividends where the DRIP share purchase price is $5.50.
This means $5.10 will be deposited to the account, nothing else happens.


The DRIP either happens, with a remainder or does not with each dividend payment. Whatever is cash after the dividend is paid is up/re-invested to the investor to spend or re-invest.


Cheers

P.S.
The other thing that might make the number change is if the stock is like Agrium and pays the dividend in US $. The currency conversion will slice off a bit of the dividend and most likely, leave less of a cash remainder. If one's dividends paid is too close to the DRIP share price, the difference could result in one less share bought than expected.

[indexxx]

Thanks all for the replies- that's what I figured but wanted to make sure.