Dividend Reinvestment Plan: How They Work and Which Stocks and ETFs Offer Them In Canada?

A reinvestment strategy is where the investor uses income in the form of dividends or interests in an investment to purchase additional units of the asset class instead of withdrawing these cash distributions. It’s a great way to increase the value of your investments over a period of time. Here, we take a look at how dividend reinvestments work and the benefits of such a plan.

Several Canadian companies across sectors pay investors a dividend. These payouts are a portion of the company’s profits that are distributed among shareholders. Dividend-paying stocks allow investors to benefit from a steady stream of passive income as well as long-term capital gains.

A DRIP or a dividend reinvestment plan is a program where investors can reinvest cash dividends to purchase additional shares of the stock on the dividend payment date. It’s an automatic arrangement that is set up by a broker and is a plan offered by several publicly trading companies on the TSX.

What is a dividend reinvestment plan?

Generally, when a dividend is paid, a shareholder receives the payout as a direct deposit into the bank account. However, a DRIP gives the investor an option of reinvesting the dividends to buy additional shares directly from the company. As these shares are bought from the company’s reserves it is not marketed on stock exchanges. So, what are the benefits of such a reinvestment plan?

Investors have the opportunity to accumulate company shares without having to pay a commission to the broker. Further, companies may also offer their stock at a discount which will lower the investor’s costs significantly compared to shares purchased on the open market. Further, companies also allow investors to buy fractional shares putting each dollar to work.

Over the long term, a DRIP provides investors an opportunity to benefit from compounded gains. A blue-chip stock generally raises dividend payments each year which then allows you to increase your holdings at a stellar pace. Over the long-term, the total return is substantial while in a market sell-off the investor can buy shares at a lower price as well.

For example, if you invested $10,000 in Enbridge stock in 1995, your investment would be worth $211,455 today, indicating annual returns of 12.5%. After accounting for dividend reinvestments, your total returns will increase to $378,588 indicating annual returns of over 15%.

A dividend reinvestment plan is beneficial to the company as well, as it provides them with additional capital. Shareholders who opt for a DRIP are also unlikely to sell their holdings when markets turn bearish as long-term investors understand that dividends can help them derive outsized gains.

Which TSX companies have a DRIP?

There are 133 companies on the TSX that have a dividend reinvestment plan. Let’s take a look at a few of these stocks here.

AltaGas

AltaGas operates as a diversified energy infrastructure company in North America and its business segments include Utilities and Midstream. Its Utilities segment owns and operates regulated natural gas distribution utilities as well as regulated natural gas storage facilities in the U.S. serving 1.7 million customers. The business also provides interstate natural gas transportation and storage services.

Its Midstream segment is engaged in natural gas gathering and processing, natural gas liquids extraction, storage, and marketing.

AltaGas stock price: $25.44

Market Cap: $7.11 billion

Dividend Yield: 5%

Algonquin Power & Utilities

Algonquin Power & Utilities derives two-thirds of its sales from the regulated utility business and the rest from renewable power. Its stable business model allows the company to generate stable cash flows across business cycles. AQN serves 306,000 electric connections, 371,000 natural gas connections, and 409,000 water distribution and wastewater collection utility systems.

Algonquin stock price: $19.59

Market Cap: $12 billion

Dividend Yield: 4.3%

Bank of Montreal

One of the largest financial institutions in Canada is the Bank of Montreal. In the most recent quarter, BMO crushed consensus earnings estimates of $2.77 per share when it reported EPS of $3.13. Its bottom-line was driven by a fall in provision for credit losses. In the last 48 years, BMO has delivered annual returns of 12.34% for shareholders, making it one of the top stocks on the TSX.

BMO stock price: $127.5

Market Cap: $82.5 billion

Dividend Yield: 3.35%

Bank of Nova Scotia

Another Canadian big bank, the Bank of Nova Scotia has also delivered stellar returns for long-term investors. In fiscal Q2, it almost doubled its adjusted earnings to $1.9 per share, easily surpassing estimates of $1.76 for the quarter.

BNS ended Q2 with a common equity tier one ratio of 12.3% which is among the best compared to peers. The stock’s consistent earnings growth and attractive valuation make BNS a top bet for 2021 and beyond.

BMO stock price: $81.23

Market Cap: $98 billion

Dividend Yield: 4.5%

Brookfield Asset Management

A leading alternative asset manager, Brookfield Asset Management is one of the largest investors in real assets. It has built a diversified portfolio of real estate, renewable power, infrastructure, and private equity assets. The company aims to generate long-term risk-adjusted returns for shareholders. It manages public and private investment products and earns asset management income.

Brookfield Asset Management stock price: $61.04

Market Cap: $96 billion

Dividend Yield: 1.03%

Canadian Utilities

Canadian Utilities has managed to increase its dividend payments for 48 consecutive years which is the highest for any TSX company. Its rate-regulated business allows the company to generate steady cash flows and expand its base of cash generating assets which in turn supports higher dividend payouts.

Canadian Utilities stock price: $36.01

Market Cap: $9.82 billion

Dividend Yield: 4.9%

Capital Power

Capital Power develops, acquires, owns, and operates power generation facilities in Canada and the U.S. It generates electricity from multiple sources that include natural and landfill gas, coal, wind, waste heat, solid fuels, and solar. Capital Power owns 6,500 megawatts of power generation capacity at 28 facilities.

Capital Power stock price: $41.06

Market Cap: $4.70 billion

Dividend Yield: 5.03%

There are several other companies that have a DRIP program including Emera, Fortis, Hydro One, and Intact Financial.

Vanguard and Horizons ETFs have dividend reinvestment plans

Vanguard also has a dividend reinvestment plan where it will reinvest ETF cash distribution without charging commissions. Here, distributions will be reinvested to buy additional units of the same ETF. You need to enroll in the plan after which the process will be automated and reinvestments will occur in five business days following the distribution payment date. Another ETF provider (among several others) that has a DRIP program is Horizons ETFs.

The bottom line

A dividend reinvestment plan has multiple benefits that have been discussed here. This process can easily be automated, allowing the investor to benefit from compounded gains over time.