One of the downsides of using ETFs—as opposed to index mutual funds—is that dividends and interest are not automatically reinvested. Instead, they are paid in cash, where they often sit idly in your brokerage account for months. This happens even more frequently now that many ETFs have started paying distributions monthly, rather than quarterly as in the past.
To address this issue, both Claymore and BMO offer dividend reinvestment plans (DRIPs) for their ETFs. For those who are unfamiliar with DRIPs, they allow investors to receive distributions—whether dividends from stocks, interest from bonds, or return of capital—in new shares rather than in cash. Only whole shares are possible: so if the ETF is trading at $20 and you’re eligible for $67 in dividends, you’ll receive three new shares plus $7 in cash.
If the amount of email I am receiving is any indication, these programs are extremely appealing to investors. Indeed, I have heard from people who are specifically choosing ETFs from Claymore and BMO rather than those from iShares because of the DRIP feature. (iShares does not currently offer such a program.) I believe this is an error in judgment.
While the automatic reinvestment of dividends is convenient, it should not be a major factor in determining which ETFs you use to build your portfolio. Here’s why:
Synthetic is just as real
ETF investors may not realize that discount brokerages offer “synthetic” dividend reinvestment plans. Unlike traditional DRIPs, which originate with the company issuing the stock or ETF, a synthetic DRIP is handled on the brokerage side. The ETF pays its distribution in cash, and the brokerage then purchases new shares in your account, without charging a commission.
There is no meaningful difference between the DRIPs offered by Claymore and BMO and the synthetic plans offered by brokerages.
Every brokerage handles things a little differently, and not every ETF is eligible, but most of the major firms support synthetic DRIPs for iShares ETFs. When I put the word out, investors confirmed that is the case at TD Waterhouse, CIBC Investor’s Edge, RBC Direct Investing, Scotia McLeod and iTrade. If you use another brokerage and can confirm whether they offer this service for iShares ETFs (and if so, for which specific funds), please share with your fellow Couch Potatoes by leaving a comment at the bottom of this post.
Unfortunately, fewer Canadian brokerages seem willing to reinvest dividends from US-listed ETFs. If yours does, again, please share below.
Don’t let DRIPs be the driver
The most important factor in your decision should be the investment strategy that the fund uses. Even if your brokerage does not allow you to DRIP a specific ETF you’re considering, it shouldn’t influence your decision.
The fact is, over the long run, whether you use DRIPs or simply collect your distributions in cash and reinvest them a couple of times a year (any time you add new money or rebalance) is not likely to have any significant effect on your returns.
The same can’t be said about ETFs that use different strategies. Most iShares equity ETFs are traditional cap-weighted index funds, while Claymore’s flagship products use a fundamental indexing strategy. BMO, meanwhile, has introduced a number of ETFs that use an equal-weighted strategy. Over time these differences are likely to have a much greater effect than the immediate reinvestment of dividends.
All of these ETFs may be good choices, and no one knows which of these strategies will outperform going forward. But the point is that you should select your investments based on your confidence in the strategy, not on the availability of a DRIP.
Good info. I’ve known about the synthetic drip available at brokerages for a while, but I imagine that lots of people don’t.
Questrade offers a synthetic drip. I’m positive it includes the Canadian iShares ETFs – I remember asking them a while back. I’m not sure if they offer it for US-listed ETFs or not.
Thanks Mike. I do use TD’s drip on all my investment accounts – works well. I always wondered if when I drip non-RRSP/TFSA accounts, are the dividends considered taxable even though re-invested in shares? I don’t think this would be the case with automatic drips. Do you know how this is handled?
@Marianne: If you use a DRIP in a taxable account you are still responsible for paying the taxes, even if the distributions are received in shares rather than in cash.
I was researching synthetic DRIPs just yesterday, and I read on the Financial Webring Forum that you can DRIP some of the Vanguard ETFs with TDWH. This would be helpful in order to avoid forced currency conversions.
Here is the link to the thread – bottom of page 10: http://goo.gl/ZZz6g
I have synthetic DRIPs setup for VTI, VEA and VWO for the last 12 months at TDWH. They worked well at distribution time in December. It appears that TDWH converts the cash distributions at US-CAD foreign discount rate, then buy the corresponding number of Vanguard ETF shares.
Cheers
@ Pascal and CCP – I have the same three Vanguard etfs dripping at TDWH and they confirmed for me that they drip whole shares in $US before making any conversion and any remainder is paid out in Canadian using the current exchange rate. It’s not ideal for avoiding foreign exchange fees, but not too bad.
Great to know that TD Waterhouse will do this with Vanguard ETFs. I know that Scotia iTrade does not. Curious about other popular brokerages. Has anyone successfully DRIPped US-listed ETFs from providers other than Vanguard?
Hi Dan,
TD Waterhouse will not DRIP Claymore as of my last enquiry ;)
@Ninja: That’s odd, because Claymore’s site indicates that virtually all brokerages support their DRIP. I’d suggest you email Claymore and ask if there’s something specific you need to do.
I see DRIPs as tiebreakers…. but there are a lot of ties among various ETFs which are awfully similar, or strategies I’m not equipped to seriously compare (XRE vs ZRE for example). For that reason, for bonds I see Claymore’s as being more interesting simply for the DRIP.
What I like most about DRIPs is that they mean I can “forget” my investments…. if I don’t look at them for 3 years, there shouldn’t be as much of a loss from un-reinvested dividends as without DRIPs.
I’m with BMOInvestorline, who have no DRIPs other than a list of 60 stocks, plus their and Claymore ETFs.
I think drips are a great idea for the passive investor. However, I like to fine tune my investments and accumulate the dividends in cash. Once I see a good deal I’ll use that cash reserve to invest.
Nice article Dan,
I guess I was under the impression that if a brokerage (like Investor’s Edge, for example) reinvested dividends for investors, then it didn’t matter what ETF or stock it was. It sounds like I was wrong. When I lived in Canada, I thought they’d reinvest dividends from anything with a dividend pulse. They did it with every stock and ETF I owned. So what’s the deal? Will they or won’t they reinvest dividends for anything with a dividend pulse? From what you (and other readers are suggesting) it’s selective. And I must just have been very fortunate with the holdings I had.
@Andrew: It’s definitely selective at most brokerages. I have no idea how they make their choices, though. It seems pretty random.
@The Dividend Ninja & CCP: I DRIP Claymore’s CBO inside my TD Waterhouse SDRSP account, so I’m certain it’s possible. Now… whether it’s Claymore’s DRIP or TDW’s ‘Synthetic’ DRIP, I’m really not sure. But, it’s there every month.
Cheers.
My accounts are at RBC Direct. They drip only some ETFs. I hold both i-Shares and Claymore and I have asked several times why they only drip some of my ETFs and not others. I have never been able to get an answer. As suggested, it appears totally random what they will drip.
TD Waterhouse for sure doing DRIP for Claymore’s CBO
For DRIP of stocks (or ETFs), I believe the underlying companies actually issue new stocks to the shareholders. This has a dilusive effect. (This is contrasted with companies buying back shares, the earnings/dividends in the next round are divided into smaller number of shares). So DRIP is not good for shareholders overall.
@MoneySheep: That isn’t true. Individual companies may issue additional shares and pay these as “stock dividends,” which do dilute equity. But the situation is not the same with an ETF.
ETFs are open-ended, like most traditional mutual funds. This means that when they receive new inflows of money (and that includes cash dividends that are returned to them), they purchase additional assets. They don’t just slice the pie into thinner pieces.
Qtrade (not to be confused with Questrade) drips at least some iShares ETFs; I have one set up with them for XBB.
Nice post Dan.
Right or wrong, I pretty much DRIP everything I own, unregistered stocks, stocks in TFSA, stocks in RRSP and ETFs in RRSP. I want to take advantage of those investments buying more investments as much as possible.
DRIPs are never the sole driver for an investment selection, but it’s certainly a nice perk ;)
Have a good weekend!
Mark
I have a DRIP going on XBB, XIU, XSP and XIN with Qtrade.
I too use DRIP wherever I can, and have never had a problem. Individual stocks and ETFs (although I’ve never done a US ETF).
@Mark: I agree that DRIPs are a nice perk — I use them myself, too.
Thanks to everyone who everyone who shared their experience with various brokerages. Hope other readers found this useful.
Qtrade does not DRIP the two Vangaurd ETF’s I have VTI, and VXUS but they do with some (but not all) Canadian ETF’s, like others have said it appears Random but I never actually asked how that worked. At least with Qtrade you can open a US$ RRSP account to avoid forced conversion, a US account does cost $50 per year so you need to have a larger balance to make it work while.
You have a great Blog, I have learned a ton from your posts and those of your readers.
J
Great post, Dan !
I didn’t know TDW allows DRIP US listed ETF. Last time I asked them about VTI and VT I recently purchased, I was told they don’t DRIP them because they are US listed.
I will check with them again. Thanks to all that shares the insight!
I asked my contact at RBC about how they decide which securities to DRIP, and here’s how he responded:
“RBC Direct Investing offers a DRIP on over 1,000 stocks and ETFs listed on the S&P/TSX Composite and S&P 500. Our objective is to ensure that the securities that are part of our DRIP have access to a liquid market. For this reason, a security must belong to one of the two indices to be eligible for inclusion in our DRIP. Securities that do not meet this requirement, but were previously part of the DRIP are automatically grandfathered. Securities that stop paying a dividend are removed from the program. Beyond having access to a liquid market, several other internal considerations are taken into account before a security is added to the program to ensure we can offer an appropriate service level.
As the list of securities may change at any time, we don’t post the list of eligible securities on our website, but instead ask that our clients call us to confirm that a particular security is eligible.”
Hi Great post!
I am currently using Questtrade for all my TFSA Dividend investing. But I have realized that the DRIP is only for entire shares, as you explained above. I have been made aware that other brokers provide partial DRIPS where the entire amount of my dividend will be reinvested. Does anyone have a list of Canadian sites or banks that facilitate this?
@Palazzo: As far as I know, no brokers allow fractional shares. To get a fractional shares I believe you need to get the DRIP directly from the company. The one exception is Canadian ShareOwner Investments: https://www.investments.shareowner.com/home/v1/index.html
People need to dig beneath the hype with ETFs – the lack of DRIPS and the trading fees (initial and rebalancing) make them hard to justify in comparison to something like TD e Funds. And the new Claymore etc DRIP offering, while a step in right direction, is not the answer – why? No partial DRIPs!! Which means it’s half a solution.
Based on my math (which could be wrong – please chime in with your pov) one would need a very large (millions) portfolio for the very small difference in MER between ETFs and TD eFunds to make a difference!!! Stop buying the ETF hype people!
Pascal and Flagen,
I checked with TDWH, the rep I spoke with is not sure if they can DRIP VT and VTI . Does it matter whether it’s within RRSP or non-registered? Mine is in the RRSP. He said he is going to check with his back office, it has been 3 days. Anything I need to mention to them to get it done? Thanks!
@Kemi My drips are within an RRSP and on VIG, VWO and VEA specifically. I had no problems setting them up.
For best service on things like this, get someone with full trading certification by choosing the phone tree menu number for placing trades/getting quotes rather than for “account information.”
To Roberts comment on ETF’s vs. e-funds, I’m fairly new to this but when I transferred my account in it made sense to buy ETF’s given it is a large one time purchase and the trading fee amounts to nothing for a one time event but I also started monthly contributions into index funds as monthly trading fees would be huge, it seems to me there is a place for both. The savings on the ETF’s is 1/2 a percent in some places, compounded over a period of time on a balance greater than 50,000 and it certainly makes sense…..as long as you making a larger purchase.
The question I am trying to resolve now is what to do with the small amounts of cash left in the accounts, my wife and I have six accounts between, RESP’s, locked in RRSP’s and spousal RRSP’s so I am left with a few hundered dollars spread between the accounts and and it will increase with dividends (I set up DRIPS where I was able) and I feel like it should be deposited somewhere but Qtrade only allows mututal fund purchases of $1,000 unless it is part of a monthly contribution. Any suggestions on where to invest the cash left over?
@Robert: It’s important to look at the whole picture. You’re comparing ETFs to the cheapest index funds in Canada (the TD e-Series) funds, and you’re right that the fee difference can be very small. But you don’t need to have millions for the difference to become significant. See this post for the math details:
https://canadiancouchpotato.com/2010/06/25/should-you-use-index-funds-or-etfs/
The other issue is that not everyone has access to the TD funds, and they do not cover all of the major asset classes, such as emerging markets and REITs. There are also many ETFs that track better indexes: for example, Vanguard’s VTI is much broader than index funds that track the S&P 500. The fact that dividends are not automatically reinvested in VTI is not a significant drawback. This is the main argument I tried to make in the post: the main driver of an investment decision should never be whether or not the fund has a DRIP. As one commenter said, it’s a tiebreaker at best.
@J: There’s no easy solution to the problem of cash drag in your accounts, but if it amounts only to a few hundred dollars, it’s really a small problem. One way to deal with it is to just wait until you;re adding new money to the account and then include the idle cash in your new purchases. If you’re only paying $5/trade at Questrade, this is very small annual expense.
Hi Flegen,
Thanks for the advice, sounds like I am not talking to the right person. I will follow up and speak to someone who can “placing trades and getting quotes” .
Kemi
If my broker is Questrade, and I setup a DRIP that is directly with a company to allow me to get partial stocks, will the new stocks show up in Questrade?
@Dilbert: I don’t think so. Best to call Questrade and ask them directly.
I can confirm that Questrade does synthetic drips on US ETFs…at least on the ones I have…IJJ, SDY, VEA, VWO…
BMO etfs – that I own: ZWB (canadian covered call banks) and ZHY (US High Yield Corp Bond C$ Hedged) do not currently drip at rbc direct investing. The reason they gave me is that they need acheive certain criteria before they offer the drip. Minimum amount of clients/money owning the stock at the particular brokerage.
Hi,
I started investing in drip stocks slowly a couple years ago through the companies themselves. As some examples, I have some with Scotia Bank, Suncor, RioCan, and a few more. I pay no commission and all DRIPS are invested back even with partial shares.
As a late twenty-year old, I’m wondering what is the best (approx.) way to invest for a nest-egg at 65. Let’s say I’m willing to put $500/mth until that time. Some couchpotato plans say that can amount to $1 Million with 5-6% interest.
So, is it better to keep buying stocks in the companies I mentioned OR is it better to get RRSP’s and do ETF’s trading OR is it better to do something else.
Thanks so much!
MAtt
@Matt: Thanks for the comment. First of all, kudos to you for getting started with investing young. In general, I like to recommend that people diversify widely rather than simply buying stocks in a small number of individual companies. So if you’re able to start investing $500 a month, you may want to look at broadening your horizons a little. Have a look at the suggestions on my model portfolio page.
Hi Dan, Thanks for all the information you have provided. I decided to go with TD and separate the TFSA from my normal Royal Bank account just to diversify banks a little.
I’m going to start with the TD Index mutual fund you mentioned in the complete or global couch potato strategy. I think?
But I’m curious, the portfolio balances 20% to Canadian funds, international funds, and u.s. funds. 40% to bonds I believe.
When I look at TD’s 10 year record for each fund, Canadian funds show a (approx) 10% average yearly gain while U.S, and International funds show a loss of -.05 %. If this is the case, wouldn’t it be better to allocate 60% to Canadian funds and forget the international and U.S ones for now? Or am I missing something else?
And lastly, as a late-twenty year old, is it still good to have 40% to bonds or better to put more emphasis on the funds?
Thanks Dan. Hope this isn’t to much but its so interesting
Matt
@Matt: If you’re going to use index mutual funds rather than ETFs, then the Complete Couch Potato is not an option: you can only build that portfolio with ETFs. The Global Couch Potato is usually just fine for smaller portfolios.
Re: US and international equities. Yes, Canada has been a wonderful performer over the last 10 years compared with the US and overseas. The question is, can we realistically expect this outperformance to continue? International stocks were the big winner in the 1980s, and the US blew everyone else out of the water in the 1990s. Over the very long term, equities in all developed countries have performed very similarly, but they follow very different paths to that result. By diversifying globally, you can lower overall volatility and make sure you don’t make a big bet on the one region.
The 60/40 equity/bond split is just a starting point. You can adjust the mix according to your own specific needs and risk tolerance. Many young investors do indeed allocate more to stocks if they are comfortable with the volatility.
Good luck.
I inquired about setting up synthetic DRIPs within my self-directed RRSP at TD Waterhouse. These DRIPs would be for ETFs. I wonder if the answer one gets depends on who answers the phone at TDW.
I was told that the ishares ETFs: XRE and XRB were eligible
but that Canadian and US listed Vanguard ETFs: VRE (CDN) and VTI & VXUS (US) were not
Also BMO ETFs: ZAG and ZCN also were not eligible.
Givne the postings on this board I wonder if I call back and get someone else whether there will be a different response.
@Amir: It is pretty surprising that the Vanguard Canada and BMO ETFs are not eligible (although VRE is is brand new and may not have been added to their list yet). Not too surprised about VTI and VXUS: US-listed ETFs are not usually eligible for DRIPs.
@CPP and @Amir: according to this, Vanguard Canada ETFs should be eligible for DRIP: https://www.vanguardcanada.ca/individual/articles/news-commentary/vanguard-news/drip-news-article.htm.
I’m currently using RBC Direct and currently discovering that while they may DRIP “over 1000 stocks and ETFs”, only a single ETF of the many ETFs I hold with them across 3 accounts is eligible for DRIP, very annoying. No fixed income ETFs or US ETFs (including US Vanguard, iShares, and Schwabb) that I have with them will DRIP. Quite the let down after setting the blanket setting across all accounts to DRIP everything.
I’ve traded more emails with RBC Direct support. The latest information I’ve gotten back from them is “To ensure that there is a liquid market for securities being offered on the program, only securities that are a part of the S&P 500 or the S&P/TSX Composite indexes will be eligible for participation in the DRIP program. . . . and that participation requires a minimal amount of RBC DI client’s to own a particular stock for that stock to be eligible as well (i.e. S&P 500 stocks are not all automatically part of the DRIP).”
That would seem to me to narrow the selection of stocks / ETFs at RBC available for DRIP considerably. And exclude just about any index ETF that didn’t follow one of those two indexes – i.e. the majority of ETFs in the CCP model portfolios.
First of all, thank you for this blog. I have learned alot and have benefited greatly by the knowledge I have gained here. A bit of context: I plan on holding BMO ETF ZDV (CDN High Dividend) in my TFSA for a long-term investment. As RBC will not DRIP this security, will I be taxed on the dividends (not sure if dividends gained a TFSA are tax free) ? Since RBC will DRIP Ishares CDZ, is this the better choice? (there is a .30 difference in MER).
All the best
@Ben: It’s important you understand the tax rules here. A DRIP makes no difference when it come to the taxation of dividends: whether you receive the dividend in cash or in the form of new shares, you still pay tax on it. But this applies only to non-registered accounts: dividends are not taxed if the ETF is held in a TFSA.
Great blog. I learned so much here. Especially, many contributors have given a perspective that one can only glean from many hours of spent time with one’s broker. I should have been more careful in the past. Now I know why I am a laggard when it comes to improved investments. Thanks CCP…!!
The full service broker I used is a dud. Name shall remain hidden. He never mentioned anything of this sort and never kept me informed except for monthly statements which I never bothered to even open because the performance was poor. All his interest was to line his own pockets. Old adage: NO ONE will care for your money except you. If you are a young person reading this, be very careful with whom you deal and trust your money. I am so glad I switched to discount broker. Things are looking up already.
I was wondering if BMO ETF’s ZAG or ZDB offers the discount share price when a using a DRIP in a discount brokerage?