Why you need a few DRIP stocks
Financial Post July 11, 2009
The client: A high-income married couple in their late-40s, with two teenage sons. Susan has $88,000 in her employer’s group RRSP, which the employer matches at 4%/year in contributions. Frank has $540,000 in an RRSP, and no pension plan. The couple has $80,000 in a joint investment account consisting of a labour-sponsored venture capital fund and four Canadian equity mutual funds of equal value.
The portfolio: The RRSP is held in three separate parts: money market fund, a managed-growth portfolio and a Canadian small-capitalization fund. Susan readily admits she doesn’t really understand what she selected, but her HR department doesn’t offer her anyone with whom to sit down to explain the choices. Frank is in a similar position: his previous advisor classified him as a “growth” investor after quizzing him about risk-and-return, about which Frank knew little. As result, 20% of his money is in a bond fund, 40% is in a Canadian equity fund, 20% is in a U. S. equity fund and 20% is in a European fund. All of these are bundled together into a single managed portfolio. It was sold to him as an elite program available only to “special” clients — but he doesn’t feel the returns, or the fees, have been all that special.
The problem: “Frank and Susan are scared,” says Kurt Rosentreter, a certified financial planner and senior financial advisor at Manulife Securities Inc. in Toronto. “They are approaching age 50 and realize they only have 10 or so years before retirement. They don’t feel they understand their investment plan, and aren’t sure if their most recent advisor was just another sales-guy with no real advisory skills.” On top of that, they aren’t clear on their annual fees, and don’t know how their portfolio has performed over the past few years. They want a plan want that will let them take control of their finances.
The fix: Mr. Rosentreter’s first step was to create a financial plan based on their short-term and long-term goals, including debt reduction and a tuition fund for their sons. “You need to create the possibility for success long before you can ever start investing,” he says. Now it was time to tackle their investment portfolios. Susan’s RRSP was gutted completely. The small-cap fund she picked was for high rollers, the managed-growth portfolio was more complex then necessary, and “the money market fund is effectively cash, paying almost zero return in 2008,” Mr. Rosentreter says. “As a retirement savings pool, there is no need for a cash product: bonds are better.” Frank’s RRSP — with a high annual cost of 2.7% of assets and less-than-stellar performance — and the joint account that hadn’t seen growth in a decade both met the chopping block. They sold it all. The joint account is taxable savings, so he chose to invest in the top 16 Dividend Reinvestment Plan (DRIP) stocks in Canada.
The advice: “DRIP stocks are stocks that pay high, consistent dividends where the dividends can be reinvested to buy more shares each time they are paid, with zero commission,” Mr. Rosentreter says. “Over time you will grow more and more shares and the dividends will get bigger and bigger. Every Canadian should have a little DRIP stock portfolio growing.”
The outcome: Seventy percent of the money from the combined RRSP sales was invested in one-to five-year term deposit GICs, with no single issuer exceeding the $100,000 CDIC-insured limit. “GICs offer higher returns and are easier to understand than government bonds,” Mr. Rosentreter says. “They are also lower risk than corporate bonds and produce far more consistent returns than most bond funds and bond ETFs.”
THE NEW PORTFOLIO – RRSP: 70% fixed-income, 30% equity – 70% GICs – 20% Claymore Canadian Core Index ETF — holds all of the largest Canadian stocks – 5% Ishares S&P500 Index ETF — holds the 500 largest businesses in the United States. Currently hedged, meaning fluctuations between the Canadian and U. S. dollar are neutralized – 5% global equity, emerging market and Asian equity mutual funds
JOINT INVESTMENT ACCOUNT: – $80,000 ($5,000 in each of the top 16 DRIP stocks in Canada)