When it comes to investing, there are various strategies and tools available to maximize your returns. Two popular options are Drip (Dividend Reinvestment Plan) and DSPP (Direct Stock Purchase Plan). While they both offer opportunities for investors, it's important to understand the differences between the two and determine which one is best suited for your investment goals. In this article, we'll delve into the details of Drip and DSPP and explore their benefits and considerations.
What is Drip?
Drip, also known as Dividend Reinvestment Plan, is a program offered by major investment brokerages in Canada. Although the term specifically refers to dividends, Drip plans generally apply to any source of income generated by eligible securities. The concept is simple: when you purchase dividend- or income-paying securities, you have the option to reinvest the dividends automatically to purchase additional full and/or fractional shares of the security at no extra cost.
One of the main benefits of Drip is the ability to buy additional shares of a company you already own without any additional commission fees. This feature was particularly useful in the past when brokerage commissions were higher. Depending on the size of your account and the brokerage you use, utilizing Drip can save you significant amounts of money in commission fees.
For small accounts, Drip can significantly reduce the cost of investing for both stock investors and exchange-traded fund (ETF) investors. With smaller balances, trading small amounts can be costly on a percentage basis. Drip allows you to reinvest cash dividends without incurring additional commission fees. However, it's important to consider the overall cost of investing and not focus solely on the benefits of Drip. If you have a tax-free savings account (TFSA) or registered retirement savings plan (RRSP) contribution room, choosing Drip for non-registered holdings may cause you to miss out on the tax advantages of these registered plans.
Should You Invest in Drip?
Drip can be a beneficial investment strategy, particularly for those with small accounts and high trading costs. By automatically reinvesting dividends, you can increase your holdings without incurring additional fees. However, it's important to consider your overall investment strategy, including tax implications and asset allocation, before deciding to invest in Drip.
Hewlett packard dividend payout: complete guideIf you fund your TFSA or RRSP by withdrawing funds from a non-registered account, it may be more advantageous to not use Drip for your non-registered holdings. Instead, you can use the cash available from these distributions to fund your registered plans. This avoids triggering capital gains or losses when selling your non-registered holdings. Additionally, some brokerages allow you to easily turn Drip on or off, giving you the flexibility to receive dividends in cash rather than reinvesting them.
It's important to note that dividends received through Drip programs are considered taxable income in the year they are received. Your adjusted cost base increases when these dividends are reinvested, as you are purchasing additional shares with the cash. Therefore, it's crucial to understand the tax implications of receiving dividends and to ensure you are aware of what is being reinvested in your non-registered account.
What is DSPP?
DSPP, or Direct Stock Purchase Plan, is another investment option available to investors. This plan allows individuals to purchase stocks directly from the company, bypassing traditional brokers. DSPPs are typically offered by large corporations, including Hewlett Packard (HP), as a way to attract individual investors.
DSPPs provide an opportunity for investors to buy shares directly from the company, often at a discount to the market price. This can be beneficial, especially if the stock price is expected to increase in the future. Additionally, DSPPs often have lower fees and minimum investment requirements compared to traditional brokerage accounts.
However, it's important to note that DSPPs may have limitations and restrictions. For example, some DSPPs may require a minimum holding period before shares can be sold, or they may limit the number of shares that can be purchased. Additionally, DSPPs may not offer the same level of research and analysis as traditional brokerage accounts, so it's important to conduct your own due diligence before investing.
Hewlett packard: properly dispose of old computersBoth Drip and DSPP offer unique opportunities for investors to maximize their returns. Drip allows for automatic reinvestment of dividends, while DSPP provides the ability to purchase shares directly from the company. When deciding between the two, it's important to consider your investment goals, tax implications, and overall investment strategy. By understanding the differences between Drip and DSPP, you can make an informed decision and choose the option that aligns with your financial objectives.