Saturday, April 01, 2006

Manulife's Dividend Reinvestment Plan

The Globe and Mail, Rob Carrick, 1 April 2006

Manulife Financial has just handed small investors a gift with an unpleasant surprise inside.

Manulife introduced a dividend reinvestment plan, or DRIP, last month that will give shareholders the option of having their dividends used to buy new shares instead of paid in cash. Manulife also created a share purchase plan, whereby shareholders can buy additional stock directly through the company.

Companies as big and successful as Manulife don't introduce DRIPs very often these days, so this is big news for investors who appreciate the slow, steady wealth-building potential of reinvesting dividends without paying brokerage costs. Unfortunately, in a move that could be a trendsetter for other big companies, Manulife decided to depart from the custom in Canada and charge investors fees and brokerage commissions to use its DRIP and SPP.

The two Manulife plans still have some appeal to the investor who wants to build a position gradually in a Canadian blue-chip company with a global reach (full disclosure: I'm a Manulife shareholder). But it also serves as a reminder that there are other DRIPs and SPPs that not only forego fees, but also let you buy shares at a discount.

Manulife's fee schedule is as follows: for the DRIP you pay 5 per cent of the reinvested dividends up to $6 per quarter (plus GST), as well as a nominal brokerage commission of 4 cents a share purchased with those dividends; for the SPP, the cost is $15 per purchase plus the same brokerage commission. Selling DRIP or SPP shares costs $20 plus commissions and an additional charge of 6 cents a share.

"That seems very stiff to me, to be honest," said Norman Rothery, a financial consultant who has for years maintained a DRIP database on his very useful website, Stingy Investor ( "Fees are pretty common in the U.S., but they're unusual in Canada. Most of the time, it's a no-fee situation."

Manulife's explanation is that it's in a unique position with respect to its new DRIP because of its vast base of almost 900,000 shareholders in Canada and the United States. Terri Neville, the insurer's assistant vice-president of shareholder services, said that if the percentage of shareholders using the DRIP is in line with other established companies, then the cost of administering the plan would represent a considerable expense to be borne by all the company's shareholders, regardless of whether they used the DRIP.

"We thought, do we want everybody to pay the cost of something maybe 30 per cent of the people will use?" Ms. Neville said. "We decided, no, we don't. We thought it was more equitable for people who want it to pay for it, and people who don't want it don't have to pay."

Fees like those charged by Manulife are fairly common among big U.S. blue chips, although the amounts are sometimes lower. For example, Verizon Communications Inc. charges $2.50 (U.S.) for cash purchases of shares, $1 to $2 for reinvested dividends and $10 to sell shares, while IBM charges up to $3 for reinvested dividends, $5 for optional cash purchases and $15 to sell shares.

Ms. Neville suggested that charges like this will be increasingly common among big Canadian companies that want to introduce DRIPs but also control administrative costs. "I know there have been very few issuer-paid plans started up in the past few years for the reason that it's really starting to hit the bottom line," she said.

Fortunately, many blue-chip Canadian companies still have no-cost DRIPs, including each of the Big Six banks, BCE Inc., Fortis Inc., Imperial Oil Ltd., Magna International Inc., Suncor Energy Inc. and TransCanada Corp. Many income trusts offer free DRIPs as well, as do a few closed-end funds such as Canadian General Investments. (Closed-end funds are basically mutual funds that trade like a stock).

Companies offer DRIPs to help raise capital and broaden their shareholder base. Some companies are eager enough to pursue these goals that they build a discount into the price of shares that investors buy through dividend reinvestment or SPPs, or they provide a small bonus of extra units.

Discounts run from 2 to 6 per cent of the market price at the time the shares are purchased, while the bonuses are usually in the 3-per-cent range and apply to the amount being reinvested. "It's a pretty sweet deal and well worth using," Mr. Rothery said.

Not surprisingly, the highest-profile companies don't offer discounts on their DRIPs. But you will find discounts available from companies and trusts such as the following.

ARC Energy Trust (AET.UN). Widely considered to be one of the more stable oil and gas energy trusts, ARC offers a 5-per-cent discount on reinvested dividends and cash payments used to buy more units.

H&R REIT (HR.UN). Canada's second-largest real estate investment trust offers a 3-per-cent discount on its DRIP, but not its SPP.

MDS Inc. (MDS). This health care company offers a 5-per-cent discount on its DRIP, but not on its SPP.

Nexen Inc. (NXY). One of the largest oil and gas producers listed on the Toronto Stock Exchange, Nexen offers a 5-per-cent discount on its DRIP.

RioCan REIT (REI.UN). RioCan is the largest REIT in the land and it offers a discount of 3.1 per cent on its DRIP, but not its SPP.

There are actually two kinds of DRIPs, the traditional offered by companies and an alternative run by many full-service and discount brokers. If Manulife's new DRIP proves to be a trendsetter, those brokerage DRIPs are going to be an increasingly attractive option.

With a company-offered DRIP, you have to buy a share or shares of a company through a broker and request that the share be registered in your name and sent to you. Next, you complete a DRIP enrolment form (they're available from corporate investor relations departments) and send it to your company's plan administrator, known as a transfer agent. Many DRIP companies allow you to reinvest dividends into fractional shares, which means you can put every penny of your quarterly dividend payments to work in buying new shares.

With a broker DRIP, your broker collects the dividends and reinvests them in new shares. Many brokers do this without fees or commissions, but be sure to enquire about any costs.

Broker DRIPs offer a few conveniences over company plans, one being that you can keep your DRIP stocks under the same roof as your regular investments. Another is that you don't have to pay the fees associated with buying a share, having it registered in your name and then sent to you so you can enroll in a company plan.

The drawbacks of brokerage DRIPs are that you probably won't be able to buy fractional shares with your dividends, and you won't be able to buy extra shares at no cost using a share purchase plan.

A good alternative to both types of DRIPs is to use the services of Canadian ShareOwner Investments (, a brokerage that has commissions as low as $9 and free reinvestment of dividends. ShareOwner Investments is an offshoot of the Canadian ShareOwner Association, which promotes sound investing by small investors through the bimonthly ShareOwner magazine.

Hard-core Canadian DRIP enthusiasts will be interested to know that Manulife now offers a direct purchase plan for its U.S. shareholders, whereby they can buy their first shares directly through the company rather than a broker. DPPs are common in the U.S. market, but regulators haven't showed much enthusiasm about allowing them to be introduced here.

"We can't do it in Canada because the regulations won't allow it," Manulife's Ms. Neville said. "We really wish they would."

Many publicly traded companies allow shareholders to use their dividends to buy more shares at no cost through a dividend reinvestment plan, or DRIP. Manulife Financial has a new DRIP that breaks this custom by charging fees, but there are several TSX-listed companies and income trusts that both offer no-cost DRIPs and either allow investors to buy new shares at a discounted price, or provide a small bonus on the dividends reinvested. These companies and trusts include those below.

Agnico-Eagle MinesAEM 5%
Allied Properties REIT AP.UN 5%
ARC Energy Trust AET.UN 5%
Calloway REIT CWT.UN 3%
Canadian REITREF.UN 3%
Contrans Income Fund CSS.UN5%
Enerplus Resources FundERF.UN 5%
First Capital Realty FCR 2%
Fort Chicago Energy Partners FCE.UN 5%
Inter Pipeline FundIPL.UN 5%
MDS Inc. MDS 5%
Nexen Inc. NXY 5%
Paramount Energy Trust PMT.UN 6%
Pengrowth Energy Trust PGF.B 5%
Penn West Energy Trust PWT.UN 5%
Plazacorp Retail PropertiesPLZ 3%
Primewest Energy PWI.UN 2%
Pulse DataPSD 5%
Retirement Residences REITRRR.UN 3%
RioCan REITREI.UN3.10%
Summit REITSMU.UN 5%
TransAlta Corp.TA 5%
TransAlta Power LPTPW.UN 5%
Vermilion Energy TrustVET.UN 5%

Source: The Stingy Investor Website, Computershare Ltd., CIBC Mellon, Company Websites