Also published in:

The Province Thursday, June 17, 2004

A few DRIPs can mean more than a few drops to a portfolio -- if an investor knows how to use them.

Dividend re-investment plans, available from many blue-chip companies, allow shareholders to re-invest dividend payments into new shares in that same firm.

Some finance experts call it a great way to build your investment because it allows for compounding -- the more shares you buy from reinvesting dividends, the higher your dividends will be over time.

But many investors aren't even aware such plans exist, even though many consistently profitable companies such as BCE, Imperial Oil and many major Canadian banks provide the option to shareholders.

"Are they used a lot? Probably not. Could they be? Yes," said Adrian Mastracci of KCM Wealth Management Inc. in Vancouver.

"I think a lot of people may not even know that these things exist. If the investor knew that these things existed more, they would probably use more of them."

DRIPs have benefits other than just compounding. For example, they're a low-cost way to invest, since they eliminate brokerage fees. "If you went out and bought the same stock commercially, even through a low-cost commission account, you would have to pay a commission every time.

"That's the biggest attraction," Mastracci said.

Investors reap their rewards immediately, instead of having to wait until they have the extra cash to buy additional shares.

"They're a really savvy investment tool for investors," said Patricia Lovett-Reid, senior vice-president at TD Waterhouse.

While stocks that pay dividends at all are well sought, "in order to really improve your overall net worth, you have to continue to keep that dividend working for you. And so by having the option of re-investing it right back in, it's just a great way to accumulate wealth."

The fact that most companies that make DRIPs available tend to be more conservative stocks with consistent earnings makes them even more attractive, offering the investor "one more bell and whistle that allows you to participate in that company," Lovett-Reid said.

DRIPs also essentially force an investor to save since the dividend is exchanged for shares instead of ever being cashed in.

"It's along the same lines of pay yourself first," said Lovett-Reid.

"If you pay yourself first right off the top, you never miss it. If you never get the dividend, you don't miss it, because it gets reinvested."

She says DRIPs also take a lot of the guess work out of when and when not to buy more shares in a company -- in other words, trying to time the market. And by re-investing regularly, an investor will benefit "dollar-cost averaging," whereby investing at fixed intervals results in more shares being bought at lower prices and fewer at higher prices, which in theory will reduce the overall cost of the investment.

Mastracci cautioned that many DRIPs have different conditions set by the company, which can limit when and how much you can re-invest. However, some plans allow shareholders to re-invest in fractions of shares, which can be beneficial.

He also said stocking up on DRIP stocks is not the easiest way to build a diversified portfolio, since you're re-investing in companies you're already holding, instead of picking up stocks in various companies and just paying a broker's fees to do so.

"You can't buy everything this way," he said.

But Mastracci added that DRIPs can be an easy way for parents to build a nest egg for their children because of the compounding effects of the re-investments.

When building a child's account, parents "probably don't have a lot" of extra cash to invest there to begin with, Mastracci said.

"And the more you spend on commissions, the more goes out the window -- the less you have to invest."

NOTE: The information provided above is intended for general informational purposes only. It does not constitute advice for anyone's specific situation. Everyone should always first consult directly with their advisors to determine the appropriateness of any information contained above before taking any action. KCM Wealth Management Inc. assumes no responsibility for any loss or damage arising from the use of, or reliance upon the above information.