The Secret Weapon of Stocks that Pay Dividends: Staying Power Support

Everyone has their own reason for buying dividend-paying stocks. Some investors buy dividend stocks for the income. Others buy them for the benefit of enrolling in a Dividend Reinvestment Plan. I buy them for various reasons, but for me one of their best benefits is their secret super-power: supporting willpower.

Bank of Nova Scotia, BNS, and the Best Benefit of a Strong Dividend for the Investor

A couple of years ago, I bought some stock in the Bank of Nova Scotia, often called ScotiaBank. It had room to increase its dividend and was already paying a pleasant 3.7% per share, miles above the rate then offered by GICs. Given that it is one of the “big 5” Canadian banks to many minds, including mine, it had about the same security as a GIC, admittedly without the benefit of CDIC backing.

Anyway, BNS had a minor pullback of about $5 so I gleefully logged on and bought some shares.

You’ve all read this book before: the stock promptly plummeted.

In fact, it fell as much as $12 a share during the course of its following rollercoaster value ride.

But each quarter, that handsome dividend popped into my account. And in fact, it grew. In the short time I’ve held the stock, the yield is now 3.81% based on the price I paid for the shares. UPDATE: Now it’s 4.1%!

Dividends Can Encourage Patience and Support Staying with a Stock

That steady, rising dividend provided me with the patience to stick with my purchase even through the dropping share price.

On paper, I had lost 20% (!) of my investment. If I had sold the BNS shares, that would have been a real, irretrievable loss. Since this investment was in a registered account, I could not even have claimed the loss against another capital gain to mitigate taxes. It would have been a real permanent loss.

However, bolstered by the dividend, I stuck to my investing plan. I still believe that the Bank of Nova Scotia was a decent investment at a decent price. I expect in the long term it will appreciate in value. And it was purchased as a long term investment.

Now, the price of Bank of Nova Scotia stock has gradually climbed back up to where I bought it. By not panicking and selling an investment I believed and believe has merit, I did not experience a capital loss. In fact, I am slightly ahead because of the dividend.

Staying with a Stock Should Depend on the Future Prospects for the Company

I’m not saying you should stay with every stock that plunges. Anyone who invested heavily in Yellow Media, YLO, knows that sometimes, no matter what the yield, you have to man the life rafts and watch it sink.

However, if you’ve looked again closely at what a company is doing, and maybe sounded out the opinions of others on the same stock, and you still believe the company is worthwhile then you may just need to grab your willpower and hold on.

Should You Only Invest in Dividend Paying Stocks?

No. I wouldn’t say that. I do think there’s nothing wrong with investing in only dividend stocks, but neither is there anything wrong with investing purely for capital gains. It depends on your investing goals, philosophy and style.

Stocks that Pay No Dividends Must Cover Inflation before Making a Profit

However, I will say it has been much harder to sit tight and wait for an investment in a resource stock to rebound. This stock does not pay any dividends. It has been caught, like most petroleum stocks, in the world-wide sine-wave cycle of oil consumption and prices. Just as Suncor and Imperial Oil have had their low spots in the past two years, so has this one.

I intend to hold and wait as I still believe the company is sound and it will rebound. But knowing that the money invested in that stock is stagnant, earning nothing while I wait, is annoying. Next time, I think I would probably not invest in a similar stock if it didn’t offer at least a small dividend.

As it stands right now, this stock has to rebound about 6% above what I purchased it at, just to cover off the cost of inflation since I bought it. The BNS stock, on the other hand, covered inflation with its dividend.

When Practical Buying for Capital Gains and Dividends Makes a Great Combo

Not every stock offers both the potential for capital gains and a good dividend.  But stocks that do offer both make a great combo deal. If you spot one, give it a really serious look. You might make a delicious little profit, with a side order of less stress!

Further Information
If you’re holding onto a dividend paying stock for the long term, you might also consider a dividend reinvestment plan. For more info, you may like to skim

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Pros and Cons of Setting Up a DRIP for Dividends with CIBC Investor’s Edge ShareBuilder Plan

One way to use dividends from stocks and ETFs is to reinvest them by purchasing more of the same stock or fund. If this is done automatically it is called a Dividend Re-investment Plan or DRIP. There are pros and cons to setting up a DRIP for your investments in a CIBC Investor’s Edge self directed account. Investor’s Edge calls their DRIP program the ShareBuilder Plan.

Pros of a Synthetic DRIP with the CIBC Investor’s Edge ShareBuilder Plan

No Fee

There is no fee to join or use the ShareBuilder Plan to reinvest dividends earned by the investments in your CIBC Investor’s Edge account.

No Commission

One of the key benefits of a DRIP is that you do not pay any fee or commission to purchase new shares of a stock or ETF that you already own. This saves you the commission, which is often $6.95 or higher for an Investor’s Edge account. This can allow an investor who is starting with a small number of shares to gradually increase their holdings at no cost.

Prompt Reinvestment Puts Your Money Back to Work Fast

For small share purchases the commission can be a deterrent to reinvesting your dividends promptly. The cost-free DRIP program encourages you to get your earnings back to work immediately. This can be an advantage for investors whose dividend payments are so small that paying a commission to buy new stock to reinvest those same dividends would not be practical. For example, if an investor is only receiving $36 from a dividend payment, paying $9.95 to re-invest it might not be reasonable.

Share Price Discounts

Some companies also encourage investors to DRIP their dividends by offering shares at a discount to their trading price. For example, at the time this was written, you could buy Enbridge shares (ENB) at a 2% discount off their trading price. If you use the ShareBuilder Plan you are also eligible to receive these discounts. (Specifically, the Enbridge document states shares purchased “with reinvested dividends will be 98% of the weighted average of the trading prices for Common Shares on The Toronto Stock Exchange on the five trading days preceding a dividend payment date.” This discount is subject to change at any time by Enbridge.)

You Choose to Enroll All or Only Select Stocks in the DRIP

With the ShareBuilder Plan you can choose to enroll at the account level. If you do, all stocks you hold that are eligible for a DRIP will be enrolled in the CIBC synthetic DRIP. OR you can enroll individual securities in the ShareBuilder Plan. That means if you want, you can pick and choose which stocks will DRIP and which stocks will receive cash dividends. (This flexibility is valuable if you need cash flow, or if you do not want to increase your holding in certain specific companies but you do in others.)

You Can DRIP US Securities with CIBC Investor’s Edge ShareBuilder Plan

Unlike BMO InvestorLine, CIBC Investor’s Edge allows you to DRIP US securities. For more information, please see Can I DRIP US Stocks from a CIBC Investor’s Edge Self Directed Account?

Dollar Cost Averaging

You don’t hear as much about this investment philosophy anymore, but it might be of interest. The price of a stock may vary both upwards and downwards during the course of a year. If the stock pays dividends quarterly or monthly and those dividends are reinvested through a DRIP, then the investor would be paying both high and low prices. When the price is low, the investor would get more shares for the same amount of money than when the price is high. The idea is that dollar cost averaging reduces the risk that you would buy all your stock at the same moment that the stock is at an all –time high price.

Cons of a Synthetic DRIP with the CIBC Investor’s Edge ShareBuilder Plan

No Fractional Shares

The ShareBuilder Plan offered by Investor’s Edge, like that of most self directed brokerages, is a synthetic DRIP. You can use your dividend payment to purchase new shares but only to purchase whole shares. You cannot buy a fraction of a share within a synthetic DRIP. (If you enroll directly in a DRIP with the transfer agent for a stock as the registered holder of the shares you can actually buy fractional shares.)

So if your dividend pays $176 and the price of a share in the company is $81, you can buy two shares. The $14 balance of your dividend payment will be deposited into your Investor’s Edge account as cash.

CIBC confirmed this in their email response to me stating, “Excess amounts will not be accumulated or carried forward for the next month’s dividend.” So you can’t just hold the $14 until the next dividend date and reinvest it then for free. You will just receive the $14 immediately as cash.

This means if you have a very small holding of stock and it pays a low dividend, you may not be eligible to purchase ANY shares through a DRIP. You might want to do the math to check before enrolling in a DRIP. (Divide the dollar value of a single (not annual) expected dividend payment by the price of a single share to see approximately how many shares you can purchase.)

Only Certain Holdings are Eligible for the ShareBuilder Plan DRIP

CIBC advised me by email that ”Eligible securities include all dividend-paying securities listed on the TSX 300 and S&P 500….[Please] check with us regarding individual securities.”

That means you should be able to DRIP many popular companies including:
BMO, BNS, CM (CIBC), RY, TD
ENB, SU, TRP
HR.UN, REI.UN
BCE. RCI.B, T

Not all companies offer a DRIP through the ShareBuilder Plan. (In fact, not all companies offer a DRIP at all.)

You must have a certain minimum number of shares before enrolling in a DRIP if the company requires this.

How to Enroll for DRIP Using the CIBC Investor’s Edge ShareBuilder Plan

You may enroll in the ShareBuilder plan at the account level. If you do, all eligible securities will be DRIPped.

You may also choose to enroll only select securities in the DRIP ShareBuilder Plan.
CIBC advised in their email to me that, “To enroll in the ShareBuilder Plan, please call our Contact Centre…. at 1-800-567-3343 (Monday to Friday, 8 am to 8 pm ET).”

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