Dividend Re-Investment Plans. Andre J. Trottier. Introduction. Individual Investor, Retired 1997 Invested from 1975-82 Canadian Moneysaver Articles Leveraging Split Shares Frictional Costs. Topics of Discussion. Frictional Costs DRIP Power of Dividends Efficiency Simplicity
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Topics of Discussion • Frictional Costs • DRIP • Power of Dividends • Efficiency • Simplicity • Getting Started
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
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%
Federal Personal Tax Rates • $30,754 or Less----------16% • $30,754 to $61,508------22% • $61,629 to $100,00------26% • $100,000+------------------29%
Tax Avoidance Strategies • Defer income • Arrange income to be Tax Efficient • Capital gains & dividends • Interest instruments in RSP
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
Mutual Fund Facts • “Outperformance” will "Regress to the Mean" • the 1990s 80% of Canadian Funds"Did not beat the averages" • Efficient investing: • Never pay >2% commission, total • Funds charge 2.5%/yr
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
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.
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”
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 = year’s liability
Don’t Worry • No big deal, you don’t have to worry about risking your life savings, “We do that for you.”
Gold, Frankincense and MER • Most certain aspect • Distinctly “negative” aspect • Effective mgmt=enhanced returns • Do Loads & Fees matter? • ABSOLUTELY
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
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
Dividends &Capital Growth • Barron’s Article April 1999 • $100 invested in S&P 500 in 1925 • 1999 would be $9,600 • With DRIP $235,000
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)
