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DividendRe-InvestmentPlans

Andre J. Trottier

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Introduction

Individual Investor, Retired 1997 Invested from 1975-82 Canadian Moneysaver Articles

Leveraging Split Shares Frictional Costs

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Topics of Discussion

Frictional Costs DRIP

Power of Dividends Efficiency Simplicity

Getting Started

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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

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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%

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Federal Personal Tax Rates $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 Defer income Arrange income to be Tax Efficient

Capital gains & dividends Interest instruments in RSP

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

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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%

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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

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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

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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

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Regression to the Mean

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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

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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.

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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

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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%

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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

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MER Effect on Wealth

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MER and Returns

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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”

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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

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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

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Don’t Worry

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

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

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The Money Machine How the mutual fund Industry worksDaniel 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.

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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

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Dividend Effect

dividend growth - 4% annually   Year Dividend

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

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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 %

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Hawaiian Electric (HE)

Year Avg Price

Div Rate

Shares 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 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 Barron’s Article April 1999 $100 invested in S&P 500 in 1925 1999 would be $9,600

With DRIP $235,000

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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

Total $1,000.00 $4,706

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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

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

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

name

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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 $$$

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Dollar Cost Averaging

Fixed $$ amount each wk/mth/qtr Yields average entry price over a

longer period

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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

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Getting Started

Most difficult to do-INERTIA Once begun-ADDICTIVE

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Methods

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

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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

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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

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Adjusted Cost Base

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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

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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

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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

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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

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What & When to Buy

When $$$ are available Invest in your “poorest performer” Buy Low - Sell High

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In Summary

Frictional Costs DRIP

Power of Dividends Efficiency Simplicity

Getting Started