Dividend ReInvestment Plans

1
DividendRe-InvestmentPlans

• Andre J. Trottier

2
Introduction

• Individual Investor, Retired 1997
• Invested from 1975-82
• Canadian Moneysaver Articles
• Leveraging
• Split Shares
• Frictional Costs

3
Topics of Discussion

• Frictional Costs
• DRIP
• Power of Dividends
• Efficiency
• Simplicity
• Getting Started

4
Taxes, Loads Fees

• Most certain components
• Negative components
• Effective management will do most to enhance
  returns
• Goal be avoiding them..No
• Do they really matter?.Yes

5
Taxes

• Ontario 30,754, MTR 28.16
• Tax Factor 1.00 1.39
• 1.00 - 0.2816 (MTR)
• Earn 1.39 to keep 1.00
• 18.9 VISA 18.9 X 1.39 or 26.27

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Federal Personal Tax Rates

• 30,754 or Less----------16
• 30,754 to 61,508------22
• 61,629 to 100,00------26
• 100,000------------------29

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Tax Avoidance Strategies

• Defer income
• Arrange income to be Tax Efficient
• Capital gains dividends
• Interest instruments in RSP

8
Management Expense Ratios (MERs)

• Canadian average 2.50
• Was 2.30 in 1997
• US Average 1.35

9
Rule of 40

• Take 40 and divide it by the MER
• number of years to consume 1/3 of your investment
  
• 40 / 2.5 16 yrs
• front end load of 33

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Your Mutual Fund Manager Really Charging You?

• True Cost per 100,000.00 invested
•  
• MER 10 yrs 20 yrs 30 yrs
• 1.0 9,250 18,130 25,950
• 1.5 13,930 25,920 36,240
• 2.0 18,130 32,970 45,120
• 3.0 25,920 45,120 59,340
•  
• Fee Impact calculator http//strategis.ic.gc.ca

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Diminishing Returns

•  
• 1993 43 Top Quartile Mgrs
• 1994 14 out the 43
• 1995 5 out the 43
• 1996 2 out the 43
• 1997 0 out the 43

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Mutual Fund Facts

• Outperformance will "Regress to the Mean"
• the 1990s 80 of Canadian Funds "Did not beat the
  averages"
• Efficient investing
• Never pay gt2 commission, total
• Funds charge 2.5/yr

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Regression to the Mean
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Tradex Equity Fund

• -open only to public servants
• -since 1961, avg 11 return/yr
• -Philips Hager North
• - Globefund top 15 funds for 15 year performance
• -"lucky to be a Public Servant
• Reason 1.35 MER

15
John Bogle

• The easiest and surest way for a fund to achieve
  the top quartile in investment performance among
  peer funds is to achieve the bottom quartile in
  expenses.

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Nortel Employee

• BMO Funds 1.5 MER
• Year Amount 1.5 Fee
  Direct
• 2001 120,000 1,800 120,000
• 2010 332,769 4,991 375,079
• 2020 1,033,531 15,502
  1,330,768
• 2027 2,284,806 34,272
  3,229,041

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A. Trottiers Situation

• AGF American Growth 2.88
• AIC Advantage 2 2.72
• AGF International Stock Class 2.85
• Fidelity Focus Health Care 2.68

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2.80 MER Chart

• Year Amount 2.8 Fee
  Direct
• 2001 120,000 3,360
  120,000
• 2010 299,577 8,388
  375,097
• 2020 827,915 23,181
  1,330,768
• 2027 1,706,435 47,780
  3,229,041
• 2027 2,284,806 34,272
  3,229,041

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MER Effect on Wealth
20
MER and Returns
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Fund Problems

• To equal TSE 300, must beat it by 2.5 to be
  equal
• Cash position earns low returns
• Transaction costs
• Manager focused on Performance

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Tax Efficiency

• Capital Gains distributed to holders
• Holders pay the tax
• No control, just tax liability
• Unrealized Capital Gains
• i. e. MSFT on original IPO
• AIC Advantage BRK.A at 3500
• 4th Qtr purchase years liability

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10 yr Pre Post Tax Returns (US )
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Dont Worry

• No big deal, you dont have to worry about
  risking your life savings, We do that for you.

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Gold, Frankincense and MER

• Most certain aspect
• Distinctly negative aspect
• Effective mgmtenhanced returns
• Do Loads Fees matter?
• ABSOLUTELY

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The Money Machine How the mutual fund Industry
worksDaniel Stoffman

• Page 220
• Should I buy individual stocks as well as, or
  instead of mutual funds?
• If you've read this far, you've probably figured
  this out for yourself.

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DRIP Defined

• Dividends are not paid to holder
• Money buys additional shares
• Additional shares yield dividend
• These dividends create additional shares
• Thus the Dividend Effect

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Dividend Effect

• dividend growth - 4 annually
•  
• Year Dividend
• 1                              5.50
• 2                              5.72
• 5                              6.43
• 10                            7.83
• 12 8.47

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Effect of Increasing Dividends

• Year Price (8) Dividend (4) Yield on
  Cost
• 1 10.00 0.25 2.50
• 5 14.64 0.30 3.04
• 10 21.59 0.37 3.70
• 25 68.48 0.66 6.66

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Hawaiian Electric (HE)
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HE, no DRIP
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HE, DRIP
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HE Chart
34
HE Long Term
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Dividends Capital Growth

• 1952, farmer retired with 100,000
• Invested in CSBs
• 1983 son What if BMO in 52
• BMO, 3400 shares in 1952
• 1983, with splits 17,000 shares worth 456,875
• Ignoring Dividends of 410,993

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Dividends Capital Growth

• Barrons Article April 1999
• 100 invested in SP 500 in 1925
• 1999 would be 9,600
• With DRIP 235,000

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Dividend Growth
38
BMO no DRIP
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BMO with DRIP
40
BMO with DRIP50/mth OCP
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BCE no DRIP
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BCE with DRIP
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BCE with DRIP Today
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BCE DRIP with50/mth OCP
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XOM no DRIP
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XOM with DRIP
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Cemil Otars DRIP
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Cemil DRIP Summary
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The 5 DRIP Advantage

• Some cos offer a 5 discount on DRIPs and OCP
• netstockdirect.com-115 US cos
• Canadian Companies
• MDS W (5 on DRIPS)
• TD (2.5 on DRIPs)
• TA (5 on DRIPs OCP)

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Cdn Cos Paying Dividends Shrinking

• 1981 - 100 cos
• 1991 - 80 cos
• 2000 - 60 cos
• 2001 - 57 cos

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US Cos Paying Dividends

• Over 1,600 cos with DRIPs
• 40 have DSPs
• 60, one share registered in your name

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DRIP Advantages

• Can invest small or large amount
• Compounding dividend increases
• Stock price appreciation
• Dollar Cost Averaging (OCP)
• Basically Fee Free (50 of US co)
• Stable Shareholder Base
• Inexpensive Source of Equity

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Dollar Cost Averaging

• Fixed amount each wk/mth/qtr
• Yields average entry price over a longer period

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DRIP Disadvantages

• Can be Cancelled by Company
• Inability to Time Market
• Minimum OCP Amounts
• Fees are Increasing (US)
• Dividends are Taxable
• Tracking Adjusted Cost Base
• Odd Lots from mergers

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Getting Started

• Most difficult to do-INERTIA
• Once begun-ADDICTIVE

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Methods

• Direct Investing
• Single Shares
• Stockbrokers (Discount)
• Synthetic DRIPs
• On-Line Synthetic DRIPS

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Direct Investing

• 600US cos and 280 foreign cos
• www.netstockdirect.com
• No Canadian companies
• Print Enrollment Form (Internet)
• Complete and Mail Cheque
• Drawn From US Bank
• AFL, AXP, PFE, PG, XOM

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Single Share

• Most Plans, One Share to Enroll
• Buy from a Friend
• Deregistered from their name
• Registered to your name
• Buy as Group of Five
• Transfer registration to individuals

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Adjusted Cost Base
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Stockbrokers

• Buy Shares Through Broker
• Pay Commission 28.95
• Have Shares Registered to Your Name - 30.00 Fee
• Shares Arrive, Contact TA
• Request Drip SPP Enroll Forms
• Complete Return

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Synthetic DRIP

• Offered by Brokerage Firms
• Selected Shares Only (check)
• Only Whole Shares (no partial)
• TOC quarterly 0.175
• TOC 52 requires 298 shares
• Additional Purchase Commission

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On-Line Synthetic DRIPs

• Sharebuider
• Buy Shares in Fixed Amount Weekly or Monthly
• Partial Shares Allowed
• Selection of 4,000 cos
• US4/Trade
• Canadians Not Eligible
• NAFTA

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How Many Companies?

• Six to Twelve companies selected from different
  Sectors
• Buy QUALITY
• Twelve is best
• Canadian Holdings
• AL, BCE, BNS, DFS, MDS, TA
• US Holdings
• ABT, AXP, JNJ, KO, PFE, XOM

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What When to Buy

• When are available
• Invest in your poorest performer
• Buy Low - Sell High

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In Summary

• Frictional Costs
• DRIP
• Power of Dividends
• Efficiency
• Simplicity
• Getting Started