One of the best ways to minimize trading costs, particularly for clients with tiny accounts that may be too high-maintenance and low-payoff for many advisors, is the dividend reinvestment plan.

Because the minimum purchase for a DRIP is a single share, these accounts make sense for clients who don’t have enough money to meet minimum investment requirements for mutual funds or to achieve a balanced portfolio of shares by buying board lots.

Essentially, a DRIP allows the participant to reinvest dividends in shares offered directly by the company, and thereby eliminates commissions on stock trades. Most companies that offer DRIPs also offer share purchase plans, which allow investors to purchase more shares in addition to those bought by reinvesting dividends. Both the dividend reinvesting and share purchasing are done on dates decided by the company, usually quarterly, so DRIPs and SPPs are not ideal for traders who want to take immediate advantage of market fluctuations.

DRIPs are a great way to invest small or even large amounts on a regular basis, and amount to a form of dollar-cost averaging. The plans are offered by a large selection of U.S. and Canadian companies, typically blue-chips with a long history of paying regular dividends, and are a low-cost way of creating a diversified portfolio of solid, stable companies.

“DRIPs are a pretty efficient way to accumulate shares,” says Dan Hallett, president of Windsor, Ont.-based Dan Hallett & Associates Inc. “Historically, reinvested dividends have accounted for a huge share of the returns on stocks.

“With that in mind, anything that helps investors reinvest more efficiently and less expensively is a good thing.”

With graduation time coming up, a DRIP can be an ideal gift for a client to give to a young person. Once a single share or more is transferred into the name of the gift recipient, he or she can have dividends reinvested automatically or buy additional stock through the SPP.

“DRIPs are the most inexpensive way to invest and are great for young people, who seldom have a lot of excess cash,” says Dale Ennis, editor and founder of the Canadian MoneySaver magazine based in Bath, Ont., and a 20-year veteran of DRIP investing. “DRIPs are wonderful for children, as they get the kids excited about investing, and they’re a great way for newcomers to learn about stocks.”

Traditional DRIPs are offered by the issuing public corporation, but many full-service and discount brokerages offer their own versions of DRIPs. In addition, the Toronto-based Canadian Shareowners Association, which owns a securities dealer through its Canadian Shareowner Investments Inc. division, also offers a DRIP plan for 160 companies that it deems to be top-quality investments.

The terms of the various DRIPs vary from company to company, and from brokerage to brokerage, so it’s important to do some comparison shopping. The multi-company plans offered by discount brokerage houses may include companies that don’t offer their own DRIP plan, because it is the brokerage house — not the individual companies — that takes responsibility for pooling clients’ dividends and reinvesting them on behalf of plan participants.

With a brokerage-sponsored DRIP, the participant typically pays a commission to buy the original shares in the account (including RRSP accounts) and the brokerage will then buy new shares with the dividends paid, at no additional cost. Thus, the investment accumulates a little at a time with no commission. When the stock is sold, a trading commission is charged. Brokerage firms have various minimum trade costs.

The plan offered through Canadian Shareowner Investments charges $9 per trade for the first four stocks in its DRIP, and after that there is no charge, so the investor could buy four stocks or 20 for the same $36 charge. Depending on the stock, the firm has a weekly, biweekly or monthly schedule for pooling orders and buying each stock, and DRIP members must wait until the next buying date arrives for their order to be filled.

Typically, participants place an order for a dollar amount of stock rather than a specific number of shares, and Ca-nadian Shareowner Investments delivers the appropriate number of shares and partial shares, depending on the share price on buying day. (Most other brokerage house plans do not deal in fractional shares.)

@page_break@“It’s smart to accumulate a portfolio of stocks, and our DRIP plan encourages this,” says John Bart, president of both Canadian Shareowner Investments and the parent association. “We also encourage building a position gradually, with a series of purchases over months or years. To get people to practise what we preach, we need to make it cheap for them to buy small amounts of stock.”

If your client chooses to open a DRIP with one or more individual companies that offer a plan, there are some fees involved. First, the initial stock must be purchased, which will cost a minimum of $25 to $30 for the trade. Second, a share certificate must be requested from the company’s transfer agent, to put the stock in the name of the DRIP participant rather than the “Street name” of the brokerage house that purchased it. A share certificate typically costs $30 to $50.

The drawback of a traditional DRIP is that shareowners must do their own paperwork with each company, and don’t receive a single statement tracking all their companies — as they would with a brokerage or Canadian Shareowner Investments account.

It’s important to keep a running tab on the average cost of all of the shares purchased over time, which is important to know when shares are sold and capital gains must be calculated for tax purposes. Income taxes must also be paid on the dividends every year, even though these are being reinvested in new stock rather than being taken in cash. IE