What is a DRIP?
A distribution (or dividend) reinvestment plan (DRIP) is a program that allows investors to reinvest their cash distributions into new units (shares). Distribution payment is your share of the income earned. DRIPs allow investors to automatically reinvest all or a portion of the distribution amount into additional units.
What are the benefits of using a DRIP?
The power of compounding:
One of the most compelling reasons to reinvest your distributions is the speed at which compounding can accumulate. When you reinvest distributions, you expand the size of your investment over time, thereby incrementally increasing the distribution amount you will receive moving forward.
Automatically invest with less effort:
Another benefit of using a DRIP is the ease with which you can build your portfolio and position while putting in minimal work. Choosing to reinvest your distributions leads to the purchase of additional units of a fund.
Flexibility of enrolment/disenrollment in a DRIP:
One of the key features of a DRIP is the ease with which you can turn it on and off. This may help you to strategically plan the periods when you want to receive cash distributions versus when you would like to reinvest.
The last couple of years have demonstrated how unpredictable life can be. Many families have encountered financial constraints, temporary layoffs, and wage reductions during this time. Distribution payments could potentially be used as supplemental income to help offset any unforeseen financial setbacks. This may be beneficial during a period of unemployment, retirement, or to potentially assist you in the event of an unexpected crisis and when held in a non-registered account.
You can choose to DRIP or receive distribution based on what best suits your financial goals. You can choose to DRIP to accumulate units or receive distributions to complement your regular income. You can switch to receive distributions at any time by simply turning your DRIP off and re-directing the distribution into your bank account (non-registered account preferred). You can always turn on the DRIP when you no longer need the cash distribution and are ready to reinvest.
Additionally, if a partial DRIP is available, you could choose to only receive your required amount of income as a cash distribution and reinvest the remainder.
- Saving for a medium-term goal: If you are investing for something specific, like paying off your mortgages or supplementing household income, receiving distributions as an income deposited into your bank might be a favourable option for you.
- Saving for a long-term goal/retirement: If you are investing for a long-term goal like a secure retirement, DRIP can be a cost-effective way to put your distribution dollars to good use. Rather than spending the money or having it sit in a bank account, the money can be used to buy more units of the same fund.
The bottom line
All points considered, DRIPs can be a great component of your investment strategy, if using a DRIP aligns with your investing goals.
If you are still unsure whether to enroll in a DRIP or obtain cash distributions, you can consult with a financial expert who can advise you on your investment strategy. They can provide you with all the facts and information you need to make an informed decision.
Remember that any investment strategy is only effective if it aligns with your goals, and the final decision should be made at your own discretion.
Vice President, Wealth Solutions
Ray Punn is an experienced leader in management across the public and private sectors, including the Financial, Automotive, and Private Equity industries. As Vice President of Skyline Wealth, he leads a comprehensive team of Advisors, and oversees business operations, marketing, investment management, and investor relations. With a deep understanding of how each component of wealth management contributes to an exceptional investor experience, Ray and his teams focus on building long-term partnerships with Skyline Wealth’s valued investors.