Most retail investors rely on quarterly dividends to generate yields. However, for those who would want to widen their income streams, subscribing to a dividend reinvestment plan (DRIP) could be the best way to go.
Industry expert Dale Jackson told BNN that DRIP diverts dividend payouts in order to buy more shares.
"It's like a bond portfolio where dividends compound just like interest rates would compound. So you buy more stocks from the dividends, those dividends pay more dividends," he said, stressing that most public companies offer DRIPs with no fees attached. One reason is that these factors stabilise the firms' stocks.
Additionally, most exchange-traded funds and mutual funds and will automatically defer to DRIPs. Investors, however, have the option to opt out and take the cash.
Also, subscribing on DRIPs is a great way to buy shares regularly and average out costs.
It is important to note, however, that dividends on DRIPs outside a registered account are taxed as dividend income.
"If the extra shares gain in value they will also be taxed as a capital gain," Jackson said.
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