Dividend

Re-Investment
Plans
Andre J. Trottier

1
Introduction
 Individual Investor, Retired 1997
 Invested from 1975-82
 Canadian Moneysaver Articles
 Leveraging
 Split Shares

 Frictional Costs

2
Topics of Discussion
 Frictional Costs
 DRIP
 Power of Dividends
 Efficiency

 Simplicity

 Getting Started

3
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

4
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%

5
Federal Personal
Tax Rates
 $30,754 or Less----------16%
 $30,754 to $61,508------22%
 $61,629 to $100,00------26%
 $100,000+------------------29%

6
Tax Avoidance Strategies
 Defer income
 Arrange income to be Tax Efficient
 Capital gains & dividends
 Interest instruments in RSP

7
Management Expense
Ratios (MERs)
 Canadian average 2.50%
 Was 2.30% in 1997
 US Average 1.35%

8
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%

9
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

10
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

11
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

12
Regression to the Mean

13
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

14
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.

15
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

16
A. Trottier’s Situation
 AGF American Growth 2.88%
 AIC Advantage 2 2.72%
 AGF International Stock Class 2.85%
 Fidelity Focus Health Care 2.68%

17
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

18
MER Effect on Wealth

19
MER and Returns

20
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”

21
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

22
 10 yr Pre & Post Tax
Returns (US )
Pre-Tax Post Tax
(%) (%)

Vanguard
Gwth & Inc 17.92 14.96
Fidelity
Magellan 18.48 15.47
Dodge $ Cox
Income 8.35 5.60

23
Don’t Worry

 No big deal, you don’t have to worry about risking your life
savings, “We do that for you.”

24
Gold, Frankincense
and MER
 Most certain aspect
 Distinctly “negative” aspect
 Effective mgmt=enhanced returns
 Do Loads & Fees matter?
 ABSOLUTELY

25
The Money Machine
How the mutual fund Industry works
Daniel 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.

26
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

27
Dividend Effect

 dividend growth - 4% annually

  
 Year Dividend

 1                              $5.50
 2                              $5.72
 5                              $6.43
 10                            $7.83
 12 $8.47

28
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 %

29
Hawaiian Electric (HE)
Year Avg Div Shares Value
Price Rate Owned

1988 $29.75 $1.95 358.17 $10,665

1994 $33.20 $2.33 518.20 $17,204

1999 $36.00 $2.48 712.91 $25,665

30
HE, no DRIP

31
HE, DRIP

32
HE Chart

33
HE Long Term

34
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

35
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

36
Dividend Growth
Year BNS BC Gas

1989 0.44 0.74

1994 0.58 0.90

2001 $1.21 $1.30

37
BMO no DRIP

38
BMO with DRIP

39
BMO with
DRIP+$50/mth OCP

40
BCE no DRIP

41
BCE with DRIP

42
BCE with DRIP Today

43
BCE DRIP with
$50/mth OCP

44
XOM no DRIP

45
XOM with DRIP

46
Cemil Otar’s DRIP
Company June 1990 April 2001
Alcan $166.66 $538
BNS $166.66 $1,624
Aliant $166.66 $1,104
Nortel $166.66 $274
TRP $166.66 $339
TransAlta $166.66 $782
Total $1,000.00 $4,706

47
Cemil’ DRIP Summary
Cemil’s DRIP 15.10%

Avg Canadian Dividend Fund 10.40%

Avg Canadian Equity Fund 9.30%

TSE 300 9.10%

48
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)

49
Cdn Cos Paying
Dividends Shrinking
 1981 - 100 cos
 1991 - 80 cos
 2000 - 60 cos
 2001 - 57 cos

50
US Cos Paying Dividends
 Over 1,600 cos with DRIPs
 40% have DSPs
 60%, one share registered in your
name

51
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 $$$

52
Dollar Cost Averaging
 Fixed $$ amount each wk/mth/qtr
 Yields average entry price over a
longer period

53
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

54
Getting Started
 Most difficult to do-INERTIA
 Once begun-ADDICTIVE

55
Methods
 Direct Investing
 Single Shares
 Stockbrokers (Discount)
 Synthetic DRIPs
 On-Line Synthetic DRIPS

56
Direct Investing
 600+US 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

57
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

58
Adjusted Cost Base

59
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

60
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

61
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
62
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

63
What & When to Buy
 When $$$ are available
 Invest in your “poorest performer”
 Buy Low - Sell High

64
In Summary
 Frictional Costs
 DRIP
 Power of Dividends
 Efficiency

 Simplicity

 Getting Started

65