DRIPs can help you automate your investment and lead to more seamless compounding. Here’s a look at how it works and which major Canadian brokers offer it.
One of the most satisfying aspects of investing is receiving dividends. These payments come from various sources: companies share a portion of their profits; ETFs distribute income from their underlying assets. Seeing those dividend payments land in your account can be a great incentive to keep investing.
But what should you do with these dividends? While spending them is always an option, reinvesting them could lead to even greater financial rewards over time. This is where a Dividend Reinvestment Plan (DRIP) comes into play.
In this guide, we’ll explain why reinvesting your dividends can be a powerful strategy, how DRIP automate this process to enhance compounding, and which major Canadian brokers offer DRIP.
Why Reinvest Dividends?
Reinvesting dividends is often likened to rolling a snowball down a hill—the longer it rolls, the bigger it gets. This “dividend snowball” effect happens when you use dividends from your investments to buy more shares, which in turn generate more dividends, creating a cycle of compounding growth.
How Dividend Reinvestments Affect Your Growth: An Example
Consider two investors who each started with $10,000 invested in the iShares S&P/TSX 60 ETF (XIU) from October 4, 1999, to October 30, 2024. The first investor chose to spend each dividend received, while the second opted for patience and reinvested their dividends. Here’s how their investments fared:
- The first investor, who spent every dividend, achieved an annualized return of 5.21%, ending up with $35,707.08.
- The second investor, who reinvested their dividends, saw their investment grow at an annualized rate of 7.89%, amassing a total of $67,084.84.
Understanding DRIP
Reinvesting dividends can be a hassle if you have to manually log into your brokerage account each time to buy more shares with the cash dividends you’ve received. If you prefer a more hands-off approach, DRIP is a good option. There are two main types:
Synthetic DRIPs
Offered by brokerages, synthetic DRIPs allow you to automatically reinvest dividends in additional shares of the stock or ETF you own. For instance, if you receive $50 in dividends and the share price is $25, you’ll automatically get 2 additional shares. However, commissions may apply.
Treasury DRIPs
The issuing company sets up these treasury DRIPs. Instead of buying shares on the open market, the company issues new shares directly to you at a potentially discounted price, often without a brokerage fee. This type can be more flexible than synthetic DRIPs as it may allow the purchase of fractional shares.
In either case, the net effect is that you accumulate more shares of the investment instead of receiving cash dividends, compounding your investment’s growth over time.
| A sidenote on taxation: It’s generally best to use DRIPs within registered accounts like RRSPs or TFSAs. In a non-registered account, dividends reinvested through a DRIP are still considered received income. You must declare them on your taxes and pay any applicable taxes, even though you didn’t take the dividends as cash. This makes DRIPs particularly advantageous in tax-sheltered accounts where reinvested dividends don’t trigger immediate tax liabilities. |
Wealthsimple DRIP
Wealthsimple offers a synthetic DRIP, meaning that shares are purchased on the open market rather than through an issuer-sponsored reinvestment plan.
One of the unique features of Wealthsimple’s DRIP is its ability to purchase both whole and fractional shares, provided the security is eligible.
This makes it particularly flexible and suitable for all types of investors, especially since Wealthsimple operates on a commission-free model, adding no extra costs to these transactions.
Typically, the reinvestment process occurs almost immediately after the dividend is deposited into your account, assuming the dividend is received during market hours.
If the dividend lands outside of market hours, the reinvestment will typically take place within 1-2 business days when the market is open.
Learn more: Wealthsimple Review
TD Direct Investing DRIP
TD Direct Investing provides two types of DRIPs: Treasury and Market.
- For Treasury DRIPs, shares are issued directly by the issuer and are received from the Canadian Depository for Securities Ltd. (CDS) up to 2-4 weeks after the cash payable date. You’ll receive them within two business days of receipt.
- For securities not eligible for Treasury DRIP, TD offers a Market DRIP where shares are purchased on the market on the dividend payable date and are posted to your account by the end of the day, becoming visible the next business day.
It automatically determines the type of DRIP for which a security is eligible, and this selection cannot be altered by the investor.
You can find out which type of DRIP (Dividend Reinvestment Plan) your securities are using with TD Direct Investing by logging into the TD App and selecting “Contact Us,” or by calling TD Direct Investing at 1-800-465-5463. Enrollment in DRIP must be done over the phone too.
Learn more: TD Direct Investing Review
CIBC Investor’s Edge DRIP
CIBC Investor’s Edge offers a synthetic DRIP that automatically reinvests dividends into additional, whole shares, with no commissions or processing fees charged for reinvestment.
To participate, the dividend payout from an eligible stock must be enough to purchase at least one whole share, as partial shares are not an option.
To set up the DRIP for your account, you’ll need to log into Investor’s Edge, click the “More” tab, then “Preferences.” Under “Account Transactions,” select “Manage Your Dividends (DRIP/Sharebuilder Plan).”
Remember, you must configure DRIP settings separately for Canadian and U.S. sub-accounts and hold at least one DRIP-eligible security in each sub-account.
Learn more: CIBC Investor’s Edge Review
National Bank Direct Brokerage DRIP
National Bank Direct Brokerage (NBDB) offers a DRIP program with over 2,000 eligible stocks. Some stocks are eligible for synthetic DRIP, where shares are purchased on the open market, and others are part of a Treasury DRIP, directly offered by the issuer.
NBDB does not offer fractional shares; the dividend amount must be sufficient to purchase at least one whole share. To enroll in the DRIP program, you need to send a request through the secure messaging center available in your online account.
Learn more: National Bank Direct Brokerage
BMO InvestorLine DRIP
BMO InvestorLine offers a synthetic DRIP program that allows you to enroll individual eligible securities or your entire account. By enrolling, you can automatically reinvest the cash dividends paid on these securities into whole additional shares or units without paying any commissions.
You can manage your DRIP enrollment directly through the BMO Invest App or the BMO InvestorLine website by using the chat feature, or you can call their support at 1-888-776-6886 for assistance. There are no fees for enrolling in or making changes to your DRIP setup.
Learn more: BMO InvestorLine
RBC Direct Investing
RBC Direct Investing offers a synthetic DRIP that reinvests dividends by purchasing shares in the same companies on the dividend payment date.
There are no additional fees or commissions for participating in this DRIP. However, not all securities are eligible for this program, and the list of eligible securities is available on their website and may change without prior notice.
If you’re interested in setting up or learning more about the DRIP options, you can contact RBC Direct Investing directly at 1-800-769-2560 for further details and to arrange your enrollment.
Learn more: RBC Direct Investing
Scotiabank iTrade DRIP
Scotiabank iTrade offers a synthetic DRIP, but only if the dividend payout is sufficient to cover the cost of at least one whole share. To be eligible for this plan, investors need to enroll at least two weeks prior to the dividend distribution date.
To enroll in Scotiabank iTrade’s DRIP, you should select the eligible security you wish to enroll from your portfolio. Then, from the Quick Menu dropdown, choose “Enrol in Dividend Purchase Plans (DPP)” to set up DRIP.
Learn more: Scotia iTrade Review
Questrade DRIP
Questrade offers a synthetic Dividend Reinvestment Plan (DRIP) that allows investors to automatically reinvest their dividends into whole shares of the same security, commission-free. Any cash not used in the purchase of whole shares remains in your account. This plan is available for most stocks and ETFs.
You’ll need to download the DRIP Application Form from their website. When filling out the form, you can choose to reinvest dividends from “All eligible securities” or select “Individual securities” for specific investments. Once completed, upload the form directly to your Questrade account.
Interactive Brokers DRIP
IBKR Canada offers a synthetic DRIP for its clients, applicable to a list of eligible U.S. and Canadian listed common and preferred stocks and ETFs.
After confirming the receipt of a dividend payment, IBKR uses the dividend cash paid to buy additional shares of the same stock on the morning of the next trading day.
This DRIP isn’t commission-free; trades executed under this plan may incur costs. If the purchase occurs through multiple transactions, you’ll receive shares at the weighted-average price of these trades.
At IBKR, you can only toggle the automatic dividend reinvestment feature on or off for your entire account. You cannot pick which individual stocks to enroll in DRIP or exclude.
Learn more: Interactive Brokers Canada Review
