The return of the investment discount for DRIP’s?

Posted by admin on December 15, 2008 in Dividends

As reported by Money Gardener, the power utility Fortis announced it increased its dividend 4% last week, proving that financial news is not all bad news recently. Of equal significance, Fortis also announced that it is implementing a discount of 2% on the purchase of common shares issued from treasury on its dividend reinvestment plans (DRIP).

In other words, assume that Fortis was trading at $10.00/share on the day a dividend is payable (its not, I am just making the math simple). Under their DRIP, shareholders enrolled in a DRIP will received reinvested dividends as if the shares were trading at $9.80. It doesn’t sound like a lot but it adds up if you have a lot of shares and over time.

The discount pricing on the DRIP has not been very popular on dividend paying stocks lately. It is part of some DRIP’s and share subscription programs for income trusts. But with companies cash strapped, it may make a return for several reasons:

A discount may encourage more shareholders to elect for shares rather than cash easing the amount of cash needed to pay dividends in the short-term and, given that cash is king, anything that a company can do to improve the balance sheet will be explored.
Companies do charge administration fees for administrating DRIP’s (and frequent source of criticism in investing circles). Thus, it may be a small revenue earner for companies as well.

Fortis’ 2% discount is a bit on the cheap side. By comparison, TD offers a 5% discount on its DRIP program.

Please remember that most companies only offer discounts if the shares are issued from treasury and not purchased from the general market (some DRIP’s allows companies to buy shares on the open market for shareholders enrolled in DRIP’s). Some companies have substantial DRIP terms and conditions (see GE’s DRIP as an example of a well-worded and clear policy and a good introduction on how a DRIP is administered). Be sure to check the appropriate DRIP policies for details.

The one thing I am trying to determine (and will follow up on) is whether the discount is only available if you subscribe directly with the company or whether if it applies if you bought your share through a brokerage. Anyone have the quick and dirty answer?

3 Comments on The return of the investment discount for DRIP’s?

By Frog of Finance on December 15, 2008 at 10:58 am

Small correction: a 2% discount would bring the share price from $10.00 to $9.80 (not $9.98, which would be a 0.2% discount).

By Drippy Chick on December 15, 2008 at 12:27 pm

I can’t speak for all banks/brokers/etc, but I think the quick and dirty answer is “it depends”. From what I see with my broker (associated with one of the big Canadian Banks) is that they do offer discounts if the company whose dividends I’m receiving a) are Canadian, b) offers a drip directly and c) offers a drip at a discount. This particular brokerage firm only does synthetic DRIPS (those reinvestment programs which only provide whole shares to end buyers. Fractions are paid out in cash). I believe that other brokerage houses offer to synthetically DRIP companies who don’t necessarily offer real DRIPS directly.

What I would love to see is more of the brokerage firms getting on board with providing DRIPability on all equities, whether Canadian or otherwise, and whether they offer DRIPS directly themselves.

By Dividend Growth Investor on January 7, 2009 at 6:45 pm

I don’t participate in DRIPs. Since I own over 35 individual stocks, it would a pain to set up 35 drip plans and then track all revenues/losses/gains versus having it all in one single brokerage account. Furthermore not all DRIPs offer a retirement account DRIP where all your earnings are tax deffered.
Last but not least you might get a 2% discount on share purchases when you reinvest dividends, but how close is the reinvested price to the market price at the time of reinvestment?