For my 12th birthday my uncle bought me 25 shares in CIBC. Every four months for the last 14 years, I’ve received a cheque in the mail. I calculated exactly how much I’ve frittered away: $1073.25
Getting $8 every few months, and then $20, was always a nice bit of extra money to have, especially as a teenager when a few bucks meant the difference between seeing a movie AND buying a light-java-chip-frappucino or having to choose just one. I didn’t really think too much about where it was coming from, but I was happy I owned stock and vaguely knew that the younger you invested the more money you could make.
As part of a massive organizational overhaul of my finances I called CST, the company that manages investor relations for CIBC, and told them to DRIP the stock for me.
What is DRIPing and why do you need it in your life, you ask?
K so you know how when you own a stock it pays you dividends? And a lot of people take those dividends in cash and spend it on shit? Instead of spending it on shit, the company keeps the dividend and buys more shares with it.
DRIP = Dividend ReInvestment Plan
How does this help you get rich?
Think of it like this:
You own 200 shares at $100 each, that pay you $130 every year in dividends. Instead of giving you the cash every quarter, the brokerage instead, automatically, purchases shares. That dividend is now a share that also pays you a dividend. Say whhhaaa?
Fast forward 5 years, after steady dividend raises and reinvestment of dividends you are now earning $250 a year in dividends.
When the share price is lower your dividends can buy more shares, and when the share price is higher your dividends buy less shares.
It’s a wonderous capitalistic miracle that your money can make money for you.
Shares → dividends → buy shares → pay more dividends → buy more shares → pay more dividends
50 years later → filthy rich → stop reinvesting dividends, take cash instead and have a beautiful income without touching the capital.
If this is blowing your mind right now I don’t blame you. Absorbing the shock that you can literally do zero work and get paid is hard.
But if you look back at our example, based on entirely made up fake numbers, you’ll see that we were getting paid $130 in dividends, when shares were only $100. So what happened to this extra $30? In a regular brokerage, you would simple get that leftover money deposited in your account.
BUT, when you invest directly with a company you actually get that leftover money reinvested fractionally. As in, you can get 1.2 shares or 3.6 shares. This speeds up the compounding process and makes you more money.
Now, I happen to own shares directly with CIBC. As in I literally have a piece of paper that says I own shares. It’s in a safe at my parents house. Like in the olden days. These days, most people own stocks within a brokerage because it allows for more flexibility to buy and sell, and getting a stock certificate is kind of a weird paperwork hassle that costs $75.
So because of I owned them, I was able to enroll into their fractional DRIP plan.
Why I didn’t do this earlier is one of my major investing regrets, and a really freakin dumb move.
To be fair, I wouldn’t have known how to do this at 12. But I could have done this at 16, or at least 22. Literally, all it took was finding my account number, getting a form and mailing it in. Kind of an annoyance, but nothing major.
It actually upsets me that it took so long to do this because I’ve know since about the power of dividend reinvesting since I was 16 and first became interested in investing. I wrote a freakin article about it for MoneySense! I’ve always made sure my stocks within Questrade (my preferred brokerage, NOT a sponsorship or affliate link haha I wish!) were DRIP-ped, and I even first stared investing with ShareOwner because I loved how they are one of the only brokerages in Canada fractionally reinvested shares automatically. So why I didn’t think to DRIP CIBC, which has one of the highest dividend yields of almost any stock in Canada is beyond me.
Just to torture myself, and also to compel any of my readers who are on the fence about DRIPping or are too lazy to mail in a form, to get off their asses and do so now, I calculated how much more money I could have made today:
Of course the real magic of DRIPping happens with a long time horizon.
What would happen if my uncle bought those shares for me at 12, enrolled me in a DRIP immediately, and I left it in until my retirement at age 65 in 2052?**
I WOULD BE WORTH $225,000
By investing $820, once
And letting the DRIP, DRIP, DROP of compounding work it’s magic
At 65, I could stop reinvesting, and enjoy a yearly dividend income of $3468
AND STILL OWN 126.45 SHARES
My initial investment was under $1000. What if your initial investment was $5000? Or the dividend yield increased? The tax rate on Canadian dividends is basically low, so it could be all yours to keep, even held outside a tax-sheltered account.
This is not to say that YOU should invest in CIBC at all, in fact I don’t know if I would have chosen it among all the other banks, but I wanted to use a real-world example of how DRIP-ing a high-yield, stable stock could make you money over the long term.