# Question about reinvesting dividends



## indexxx (Oct 31, 2011)

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?


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## Spudd (Oct 11, 2011)

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.


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## Eclectic12 (Oct 20, 2010)

^^^

+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


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## Sherlock (Apr 18, 2010)

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


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## dcaron (Jul 23, 2009)

Sherlock said:


> 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?


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## Sherlock (Apr 18, 2010)

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.


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## Dibs (May 26, 2011)

You get paid whatever is left in cash.


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## Financial Cents (Jul 22, 2010)

@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.


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## Eclectic12 (Oct 20, 2010)

dcaron said:


> 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.


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## indexxx (Oct 31, 2011)

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


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## Eclectic12 (Oct 20, 2010)

The other wrinkle I've run into is in transferring a stock that is enrolled in the DRIP to a TFSA (or RRSP). This could also happen when the shares are sold.

I was watching the share price in the early afternoon. For the transfer, you can pick any price the stock traded for before the call to the broker to transfer. I was able to transfer on a day with a small capital gain but as I'd waited a few extra days, the dividend had already been recorded. The end result was that through the drip, I ended up with five shares plus a bit of cash from the dividend payment, in the taxable account.


Cheers


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## Spudd (Oct 11, 2011)

Yeah, my husband has one lonely Extendicare share in his account because he sold it and then it dripped a share. The fee to sell that share would be more than the share is worth, so it'll just sit there forever.


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## Toronto.gal (Jan 8, 2010)

Eclectic12 said:


> 1. The other wrinkle I've run into is in transferring a stock that is enrolled in the DRIP to a TFSA (or RRSP). This could also happen when the shares are sold.
> 
> 2. For the transfer, you can pick any price the stock traded for before the call to the broker to transfer.


1. Well, it's not really a problem per se, you just have to remember. 

As you mentioned, same can happen when you don't remember to cancel a DRIP on a timely basis prior to selling all shares [not only transferring]. 

I learned this sometime ago when I sold all shares of a company, then I noticed the handful of shares in my account. However, when the stock price went down, I ended up picking up the shares again because no way I was going to pay a commission fee for 5 shares [even if they had been AAPL, but they weren't]. 

2. I didn't know that. I have done many transfers and I was never asked the price question.

*Spudd:* that lonely share may one day be worth a fortune. :encouragement:


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## HaroldCrump (Jun 10, 2009)

Toronto.gal said:


> *Spudd:* that lonely share may one day be worth a fortune.


Yeah, no kidding -

_In 1935, Grace Groner purchased three $60 shares in Abbott Laboratories. Over the years, her shares split many times, and she reinvested the dividends each time.
...
On January 19, 2010, Groner died. When her will was opened by her attorney, he found out that she had accumulated *seven million dollars *over the years._.

http://articles.chicagotribune.com/...on-0304-20100304_1_donates-friend-lake-county


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## Eclectic12 (Oct 20, 2010)

Toronto.gal said:


> 1. Well, it's not really a problem per se, you just have to remember.


Or more importantly - be aware of the possibility and watching the dates! 

I was vaguely aware of it but certainly did not notice when the dates changed the situation.


Of course - it's a minor issue for the TFSA for me, as the "in-kind" transfer is free. As soon as there's contribution room in the future, another transfer to the TFSA will take care of it. Even if there's more of a capital gain, it will be small on so few shares! :biggrin:


As for picking the price - your comment makes me wonder if this is at the broker's choice. I've been with the same broker for both RRSP and TFSA in-kind transfers. With each phone call to request a transfer, the rep highlights that:
a) a loss can't be claimed.
b) the share price has to be a previous value prior to or at the same time as the call requesting the transfer is made and picked before the end of the call.

The rep for the first transfer was helpful as he suggested checking the share price trading range mid-afternoon before calling. 


If your broker does not ask for a preferred share price for the transfer, do they just tell you "the transfer price will be $$$"?


Cheers


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## Toronto.gal (Jan 8, 2010)

Eclectic12 said:


> 1. be aware of the possibility and watching the dates!
> 2. If your broker does not ask for a preferred share price for the transfer, do they just tell you "the transfer price will be $$$"?


1. That's just it though, DRIPPING includes that additional step when setting it up, and no different when cancelling it, but it's often forgotten!
2. They would give me an approx. amount; sometimes it matched what they told me and sometimes it was off a bit, so I assumed that they used the trading rate at the time they processed the transfer.


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