Transcript Document

Dividend
Re-Investment
Plans
Andre J. Trottier
1
Introduction
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Individual Investor, Retired 1997
Invested from 1975-82
Canadian Moneysaver Articles
Leveraging
 Split Shares
 Frictional Costs
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2
Topics of Discussion
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Frictional Costs
DRIP
Power of Dividends
 Efficiency
 Simplicity
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Getting Started
3
Taxes, Loads & Fees
Most certain components
 Negative components
 Effective management will do most
to enhance returns
 Goal be avoiding them…..No
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Do they really matter?….Yes
4
Taxes
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Ontario $30,754, MTR 28.16%
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Tax Factor = 1.00
= 1.39
1.00 - 0.2816 (MTR)
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Earn $1.39 to keep $1.00
18.9% VISA = 18.9 X 1.39 or
26.27%
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5
Federal Personal
Tax Rates
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$30,754 or Less----------16%
$30,754 to $61,508------22%
$61,629 to $100,00------26%
$100,000+------------------29%
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Tax Avoidance
Strategies
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Defer income
Arrange income to be Tax Efficient
Capital gains & dividends
 Interest instruments in RSP
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7
Management Expense
Ratios (MERs)
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Canadian average 2.50%
Was 2.30% in 1997
US Average 1.35%
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Rule of 40
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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%
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Your Mutual Fund
Manager Really
Charging You?
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True Cost per $100,000.00 invested
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MER
1.0%
1.5%
2.0%
3.0%
10 yrs
$9,250
$13,930
$18,130
$25,920
20 yrs
$18,130
$25,920
$32,970
$45,120
30 yrs
$25,950
$36,240
$45,120
$59,340
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Fee Impact calculator http://strategis.ic.gc.ca
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Diminishing Returns
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1993
1994
1995
1996
1997
43 Top Quartile Mgrs
14 out the 43
5 out the 43
2 out the 43
0 out the 43
11
Mutual Fund Facts
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“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
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Regression to the Mean
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Tradex Equity Fund
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-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
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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.
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Nortel Employee
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BMO Funds 1.5% MER
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Year
Amount
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2001
2010
2020
2027
$120,000
$332,769
$1,033,531
$2,284,806
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1.5% Fee
$1,800
$4,991
$15,502
$34,272
Direct
$120,000
$375,079
$1,330,768
$3,229,041
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A. Trottier’s Situation
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AGF American Growth
AIC Advantage 2
AGF International Stock Class
Fidelity Focus Health Care
2.88%
2.72%
2.85%
2.68%
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2.80% MER Chart
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Year
Amount
2.8% Fee
Direct
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2001
2010
2020
2027
$120,000
$299,577
$827,915
$1,706,435
$3,360
$8,388
$23,181
$47,780
$120,000
$375,097
$1,330,768
$3,229,041
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2027
$34,272
$3,229,041
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$2,284,806
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MER Effect on Wealth
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MER and Returns
20
Fund Problems
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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
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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
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4th Qtr purchase = year’s liability
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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
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No big deal, you don’t have to worry about risking your life
savings, “We do that for you.”
24
Gold, Frankincense
and MER
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Most certain aspect
Distinctly “negative” aspect
Effective mgmt=enhanced returns
Do Loads & Fees matter?
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ABSOLUTELY
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25
The Money Machine
How the mutual fund Industry works
Daniel Stoffman
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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.
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DRIP Defined
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Dividends are not paid to holder
Money buys additional shares
Additional shares yield dividend
These dividends create additional
shares
Thus the Dividend Effect
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Dividend Effect
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dividend growth - 4% annually
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Year
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1
2
5
10
12
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Dividend
$5.50
$5.72
$6.43
$7.83
$8.47
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Effect of Increasing
Dividends
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Year
1
5
10
25
Price (8%)
$10.00
$14.64
$21.59
$68.48
Dividend (4%) Yield on Cost
0.25
0.30
0.37
0.66
2.50 %
3.04 %
3.70 %
6.66 %
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Hawaiian Electric (HE)
Year
Avg
Price
Div Shares
Rate Owned
Value
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
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HE, no DRIP
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HE, DRIP
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HE Chart
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HE Long Term
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Dividends &
Capital Growth
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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
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Dividends &
Capital Growth
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Barron’s Article April 1999
$100 invested in S&P 500 in 1925
1999 would be $9,600
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With DRIP
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$235,000
36
Dividend Growth
Year
BNS
BC Gas
1989
0.44
0.74
1994
0.58
0.90
2001
$1.21
$1.30
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BMO no DRIP
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BMO with DRIP
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BMO with
DRIP+$50/mth OCP
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BCE no DRIP
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BCE with DRIP
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BCE with DRIP Today
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BCE DRIP with
$50/mth OCP
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XOM no DRIP
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XOM with DRIP
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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
$1,000.00
$4,706
Total
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Cemil’ DRIP Summary
Cemil’s DRIP
15.10%
Avg Canadian Dividend Fund
10.40%
Avg Canadian Equity Fund
9.30%
TSE 300
9.10%
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The 5% DRIP Advantage
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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)
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49
Cdn Cos Paying
Dividends Shrinking
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1981 - 100 cos
1991 - 80 cos
2000 - 60 cos
2001 - 57 cos
50
US Cos Paying
Dividends
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Over 1,600 cos with DRIPs
40% have DSPs
60%, one share registered in your
name
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DRIP Advantages
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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 $$$
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Dollar Cost Averaging
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Fixed $$ amount each wk/mth/qtr
Yields average entry price over a
longer period
53
DRIP Disadvantages
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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
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Getting Started
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Most difficult to do-INERTIA
Once begun-ADDICTIVE
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Methods
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Direct Investing
Single Shares
Stockbrokers (Discount)
Synthetic DRIPs
On-Line Synthetic DRIPS
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Direct Investing
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600+US cos and 280 foreign cos
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www.netstockdirect.com
No Canadian companies
Print Enrollment Form (Internet)
Complete and Mail Cheque
“Drawn From US Bank”
 AFL, AXP, PFE, PG, XOM
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Single Share
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Most Plans, One Share to Enroll
Buy from a Friend
Deregistered from their name
 Registered to your name
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Buy as Group of Five
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Transfer registration to individuals
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Adjusted Cost Base
59
Stockbrokers
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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
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Synthetic DRIP
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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
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On-Line Synthetic DRIPs
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Sharebuider
Buy Shares in Fixed $$ Amount
Weekly or Monthly
Partial Shares Allowed
Selection of 4,000 cos
$US4/Trade
Canadians Not Eligible
NAFTA
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How Many Companies?
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Six to Twelve companies selected
from different Sectors
Buy “QUALITY”
Twelve + is best
Canadian Holdings
AL, BCE, BNS, DFS, MDS, TA
US Holdings
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ABT, AXP, JNJ, KO, PFE, XOM
63
What & When to Buy
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When $$$ are available
Invest in your “poorest performer”
Buy Low - Sell High
64
In Summary
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Frictional Costs
DRIP
Power of Dividends
 Efficiency
 Simplicity

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Getting Started
65