# DRIP or not to DRIP?



## Erome (Jan 11, 2011)

Hi there,

I'm looking at a stock (OCS.UN) that pays a div of .70 per share. 

Since it is a stock, not a mutual fund, is there a cost per transaction to DRIP this?

I was talking with my investment advisor who said not to DRIP, but I didn't really understand the rationale. Can anyone help me with some knowledge base here? I thought DRIP would reinvest it, help me with cost averaging, and the next dividends would stack on top of that, i.e compounding?


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## KaeJS (Sep 28, 2010)

There should not be a cost to DRIP, but it would depend on your broker.

DRIPing is a personal thing.

I love dripping, but I am currently not practicing it. 

The only reason I don't currently drip is because I use margin, so I like to have the dividends come in to help bring my margin down in times when I need it, or to use that cash to take advantage of opportunities that present themselves (like soon) when the market is dying (like now).

Dripping is great, but its more valuable when you receive fixed income or dividends on a monthly basis, such as a Monthly Income Fund or a stock that pays out quite frequently, like REITS or pipelines.


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## Cal (Jun 17, 2009)

Some people like to use the dividend payment to purchase more of another stock that appears to be at a better purchase price.

Others will drip the stock as they like the company. Bonus if the company gives a DRIP discount too.

Your adviser might make more commission money buy purchasing more shares of a different company for you when the dividend payments come in.

Also, check with your broker as per fees for the drip. If there are any, change brokers. Most will pass on the discounts if you ask too.

For more basic drip info check out:
www.dripprimer.ca
www.dripinvesting.org


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## GOB (Feb 15, 2011)

If a company offers discounts, do they also apply to synthetic DRIPs?


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## Toronto.gal (Jan 8, 2010)

As the discount is offered by the companies, yes, the discount broker should pass it along without charging any commission and this is regardless whether it's a synthetic or true drip.


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## Oldroe (Sep 18, 2009)

I drip rock solid company's that I'm willing to hold threw anything.

The problem with drips is selling them about a 2 week process. I looked briefly at your stock and rejected it as a drip stock.


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## Cal (Jun 17, 2009)

GOB said:


> If a company offers discounts, do they also apply to synthetic DRIPs?


Yes. But generally only for whole shares. The remaining money (less than the price of 1 share) will be deposited as cash in your brokerage account.


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## MoreMiles (Apr 20, 2011)

DRIP makes tax calculation a nightmare in a non-registered account. If the distribution, like a REIT, contains ROC, CG, Div, and Int, then you have 4 things to calculate. Not only that, your Cost Basis will be changing all the time because of ROC, then again with additional share purchase! It's simply too much for a non-registered account to keep track.

The money you save from DRIPing will be eaten up by a book-keeper / accountant at $100-200 / hour


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## Cal (Jun 17, 2009)

MoreMiles said:


> DRIP makes tax calculation a nightmare in a non-registered account. If the distribution, like a REIT, contains ROC, CG, Div, and Int, then you have 4 things to calculate. Not only that, your Cost Basis will be changing all the time because of ROC, then again with additional share purchase! It's simply too much for a non-registered account to keep track.
> 
> The money you save from DRIPing will be eaten up by a book-keeper / accountant at $100-200 / hour


Completely agree. I would only hold a REIT or something else with a distribution in a TFSA to avoid the accounting nightmare.


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## humble_pie (Jun 7, 2009)

miles & cal are right imho. Holding most distribution-paying stocks in non-registered is a fatal mistake. Bookkeeping is over the top. In tax-free accounts these holdings are fine.

could i mention a caution here about use of the words "dividend" & "distribution." Many people call all distributions dividends.

i myself call only eligible dividends "dividends." These will earn favourable tax credits & should be held in non-registered.

i call other stocks with complex payouts "distributions." All this is just for my own records. Certainly countless others are legitimately using the 2 words to describe various kinds of payouts.

the OP in this thread, however, mentioned one stock & one stock only. It was OCS.UN. I've held that stock, so i know that it does do what it promises to do - it pays out all of its distributions as return of capital. It has never paid out anything except return of capital.

this simplifies the bookkeeping. Each quarterly distribution is to be used to write down the cost base. In the end, when investor sells OCS.UN, he will pay capital gains. Until that sale, he has no taxable income to report.

there are a few other canadian securities structured like OCS.UN. MHY.UN from marrett is another one, & i believe claymore has a similar product. The idea with all of them is to convert 100% taxable interest income into 50% taxable capital gains, by holding some futures & derivatives rather than actual interest-bearing paper in these vehicles.

OP can find a list of OCS.UN's holdings on the ocs.un website. When he does, he'll get a bit of a shock. There's a fair amount of sub-investment grade defaulted paper in there ... oops !


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## Homerhomer (Oct 18, 2010)

humble_pie said:


> Bookkeeping is over the top. !


For dividends the bookkeeping is easy, for distribution it's a pain in the butt not only because of the various component of distributions but also because the breakdown is not known until few months after the end of the calendar year. It's even worse for corporations with non calendar year, as an accountant who has to reconcile it for number of clients I can attest they are pain in the butt, thankfully most of the trusts are converting to corps ;-)


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## daddybigbucks (Jan 30, 2011)

Oldroe said:


> I drip rock solid company's that I'm willing to hold threw anything.
> 
> The problem with drips is selling them about a 2 week process. I looked briefly at your stock and rejected it as a drip stock.


Any way we can make you spill the beans on these rock solid drippers?


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## Financial Cents (Jul 22, 2010)

LOVE DRIPping, I enjoy watching my monthly income grow without me doing a thing


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## Eclectic12 (Oct 20, 2010)

humble_pie said:


> miles & cal are right imho. Holding most distribution-paying stocks in non-registered is a fatal mistake. Bookkeeping is over the top. In tax-free accounts these holdings are fine.
> 
> could i mention a caution here about use of the words "dividend" & "distribution." Many people call all distributions dividends.
> 
> ...


Fatal mistake?!? I didn't know I'd expired!!

Yes it is tedious but once the process is nailed down, it's not much worse than reconciling a monthly brokerage statement, IMHO. Using a registered account does simply the paperwork.

I like the clarification on distributions versus eligible dividends - thought I'd include US dividends as "distributions" as they are not eligible.


I am confused by the comment on OCS.UN paying Return of Capital (RoC) only distributions. There won't be taxable income to report but there may be capital gains to report *prior* to selling.

My understanding is that as long as the RoC distributions have reduced the Adjusted Cost Base (ACB) to a positive number, then yes - there is no taxable event. However, if the ACB becomes zero or negative, then all RoC distributions are reported as a capital gain, until another event results in a positive ACB.

http://www.taxtips.ca/personaltax/investing/taxtreatment/incometrusts.htm

The purchase price and distributions will influence the rate the ACB drops but with 100% distributions as RoC, it is only a matter of time.

In this situation a DRIP would help as the new purchases will add to the ACB, keeping the ACB positive for longer.


Cheers


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## KaeJS (Sep 28, 2010)

Financial Cents said:


> LOVE DRIPping, I enjoy watching my monthly income grow without me doing a thing


As do I 

However, I'm quite small-time at the moment.

My monthly income increases by about 70 cents/month (currently) give or take a few cents depending on re-investment prices.


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## Eclectic12 (Oct 20, 2010)

MoreMiles said:


> DRIP makes tax calculation a nightmare in a non-registered account. If the distribution, like a REIT, contains ROC, CG, Div, and Int, then you have 4 things to calculate. Not only that, your Cost Basis will be changing all the time because of ROC, then again with additional share purchase! It's simply too much for a non-registered account to keep track.
> 
> The money you save from DRIPing will be eaten up by a book-keeper / accountant at $100-200 / hour


Hmmm ... I must be missing something.

For the REITs I bought or had dumped on me, the broker took care of the capital gains, dividends, interest, foreign interest etc, on the T3 or T5 forms. There is the overhead of reconciling the distributions paid to the summary attached to the T forms and the totals on the T forms. However, this is not much different or more difficult than reconciling the monthly brokerage statements.

The Adjusted Cost Base (ACB) is impacted by the RoC, as well as the DRIP and/or additional share purchases. Tedious and time consuming to re-calculate but like other investment bookkeeping - if one stays on top of it and leverages computer programs, it's not the end of the world.

Of course a lot depends on how many one has to deal with. I wonder how many people who have bought an ETF realise they may have to do the same yearly ACB calculations?

http://ca.ishares.com/content/en_ca/repository/resource/press_release/pr_2011_02_17_en.pdf


In any case, it is important to be aware of it and decide how one wants to spend their time.


Cheers


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## humble_pie (Jun 7, 2009)

eclectic i love your penchant for getting all the details down just tickety-boo.

now if we put you & swashbuckling kaeJS together & somehow divided the composite, we'd get ... 2 toronto.gals !!


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## KaeJS (Sep 28, 2010)

I learned a new word today: swashbuckling


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## Abha (Jun 26, 2011)

KaeJS said:


> As do I
> 
> However, I'm quite small-time at the moment.
> 
> My monthly income increases by about 70 cents/month (currently) give or take a few cents depending on re-investment prices.


You have to start somewhere.

Give us an update when you're 45 and I'm sure your monthly numbers will be increasing by the hundreds if not thousands.

Good luck


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## Eclectic12 (Oct 20, 2010)

humble_pie said:


> eclectic i love your penchant for getting all the details down just tickety-boo.
> 
> now if we put you & swashbuckling kaeJS together & somehow divided the composite, we'd get ... 2 toronto.gals !!


When I haven't gone to enough detail - I usually regret it!

*grin* - Three toronto.gals in the Canada at the same time!
That would be something!!

On the other hand - wouldn't it be boring *without* a swashbuckling kaeJS?


Cheers


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## Cal (Jun 17, 2009)

Does this help to clarify:

http://www.milliondollarjourney.com/income-trust-distributions-and-taxation.htm

http://www.milliondollarjourney.com/how-investing-taxes-work-part-2-dividends-and-interest.htm


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## Eclectic12 (Oct 20, 2010)

Cal said:


> Does this help to clarify:
> 
> http://www.milliondollarjourney.com/income-trust-distributions-and-taxation.htm
> 
> http://www.milliondollarjourney.com/how-investing-taxes-work-part-2-dividends-and-interest.htm


Hmmm ... I'm guessing this is intended for me as my post seems to be the only one asking for clarification.

If so - the links are a good coverage of how to deal with the different types as a learning tool. However it is implying there is a lot more work than I've ever done. 

Case in point - I've never calculated the dividend tax or credits per stock, it's always been on the tax return, once.


Returning to my original point - even for dividend stock only investing, likely one has already setup a detailed tracking system to:
a) reconcile the announced dividends to the monthly brokerage statements.
b) reconcile one or more T5 forms to the totals arrived at in step a.
c) calculate the taxes and credits on the tax return from all the T5 forms.
d) investigate any discrepancies.

If one has done so in say an Excel spreadsheet - is adding a few extra calculation columns for RoC, Other Income/Interest, capital gains, Drip etc. and keeping them up to date really adding that much more time and effort? 


Note that the T3 form(s) provided for the trust units provide the yearly RoC, Other Income/Interest, capital gains, actual amount of eligible dividends, taxable amount eligible dividends and tax credit for eligible dividends. Similar to the dividends and T5, this is more of a reconciliation process than individual calculations.

Over and above the standard "make sure the amounts are correct", IMO the pieces you are on your own for are to allocate the RoC amounts to the correct investment, adjust the ACB and potentially additional capital gains if the ACB is zero or negative.


Cheers


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