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1 Dividend Re-Investment Plans Andre J. Trottier.

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Presentation on theme: "1 Dividend Re-Investment Plans Andre J. Trottier."— Presentation transcript:

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2 1 Dividend Re-Investment Plans Andre J. Trottier

3 2 Introduction Individual Investor, Retired 1997 Invested from 1975-82 Canadian Moneysaver Articles  Leveraging  Split Shares  Frictional Costs

4 3 Topics of Discussion Frictional Costs DRIP  Power of Dividends  Efficiency  Simplicity Getting Started

5 4 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

6 5 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%

7 6 Federal Personal Tax Rates $30,754 or Less----------16% $30,754 to $61,508------22% $61,629 to $100,00------26% $100,000+------------------29%

8 7 Tax Avoidance Strategies Defer income Arrange income to be Tax Efficient  Capital gains & dividends  Interest instruments in RSP

9 8 Management Expense Ratios (MERs) Canadian average 2.50% Was 2.30% in 1997 US Average 1.35%

10 9 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%

11 10 Your Mutual Fund Manager Really Charging You? True Cost per $100,000.00 invested MER 10 yrs20 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

12 11 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

13 12 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

14 13 Regression to the Mean

15 14 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

16 15 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.

17 16 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

18 17 A. Trottier’s Situation AGF American Growth2.88% AIC Advantage 22.72% AGF International Stock Class2.85% Fidelity Focus Health Care2.68%

19 18 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

20 19 MER Effect on Wealth

21 20 MER and Returns

22 21 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”

23 22 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 4 th Qtr purchase = year’s liability

24 23 10 yr Pre & Post Tax Returns (US ) Pre-Tax (%) Post Tax (%) Vanguard Gwth & Inc17.9214.96 Fidelity Magellan18.4815.47 Dodge $ Cox Income8.355.60

25 24 Don’t Worry No big deal, you don’t have to worry about risking your life savings, “We do that for you.”

26 25 Gold, Frankincense and MER Most certain aspect Distinctly “negative” aspect Effective mgmt=enhanced returns Do Loads & Fees matter? ABSOLUTELY

27 26 The Money Machine How the mutual fund Industry works Daniel 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.

28 27 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

29 28 Dividend Effect dividend growth - 4% annually Year Dividend 1 $5.50 2 $5.72 5 $6.43 10 $7.83 12 $8.47

30 29 Effect of Increasing Dividends Year Price (8%) Dividend (4%) Yield on Cost 1 $10.00 0.252.50 % 5 $14.64 0.303.04 % 10 $21.59 0.373.70 % 25 $68.48 0.66 6.66 %

31 30 Hawaiian Electric (HE) YearAvg Price Div Rate Shares Owned Value 1988$29.75$1.95358.17$10,665 1994$33.20$2.33518.20$17,204 1999$36.00$2.48712.91$25,665

32 31 HE, no DRIP

33 32 HE, DRIP

34 33 HE Chart

35 34 HE Long Term

36 35 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

37 36 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

38 37 Dividend Growth YearBNSBC Gas 19890.440.74 19940.580.90 2001$1.21$1.30

39 38 BMO no DRIP

40 39 BMO with DRIP

41 40 BMO with DRIP+$50/mth OCP

42 41 BCE no DRIP

43 42 BCE with DRIP

44 43 BCE with DRIP Today

45 44 BCE DRIP with $50/mth OCP

46 45 XOM no DRIP

47 46 XOM with DRIP

48 47 Cemil Otar’s DRIP CompanyJune 1990April 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

49 48 Cemil’ DRIP Summary Cemil’s DRIP15.10% Avg Canadian Dividend Fund10.40% Avg Canadian Equity Fund9.30% TSE 3009.10%

50 49 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)

51 50 Cdn Cos Paying Dividends Shrinking 1981 - 100 cos 1991 - 80 cos 2000 - 60 cos 2001 - 57 cos

52 51 US Cos Paying Dividends Over 1,600 cos with DRIPs 40% have DSPs 60%, one share registered in your name

53 52 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 $$$

54 53 Dollar Cost Averaging Fixed $$ amount each wk/mth/qtr Yields average entry price over a longer period

55 54 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

56 55 Getting Started Most difficult to do-INERTIA Once begun-ADDICTIVE

57 56 Methods Direct Investing Single Shares Stockbrokers (Discount) Synthetic DRIPs On-Line Synthetic DRIPS

58 57 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

59 58 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

60 59 Adjusted Cost Base

61 60 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

62 61 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

63 62 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

64 63 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

65 64 What & When to Buy When $$$ are available Invest in your “poorest performer” Buy Low - Sell High

66 65 In Summary Frictional Costs DRIP  Power of Dividends  Efficiency  Simplicity Getting Started


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