DRIP

A DRIP automatically converts cash dividends into additional shares of the paying stock, usually without a transaction commission and sometimes at a small discount to the market price. Over long holding periods the compounding effect is material: an investor who reinvests all dividends in a long-running dividend payer accumulates meaningfully more shares than one who takes dividends in cash and does nothing with them.

Two flavours of DRIP exist in Canada. A "synthetic" or "brokerage" DRIP is run by the broker — it takes the cash dividend and buys whole shares in the market (fractional shares are usually rounded down, with any remainder sent as cash). A "company-sponsored" DRIP is administered by the issuer's transfer agent, often supports fractional shares, and sometimes offers a 1-5% discount to the reinvestment price.

DRIP shares still carry all the usual tax treatment. In a non-registered account, the reinvested dividend is a taxable event in the year received, and the cost of the new shares is added to the adjusted cost base at the reinvestment price.