BMO DRIP, the Real Deal

When I go into a book store to buy a book, or just to browse, I have a tendency to end up buying the first book that I pick up. As often as not, it ends up being the book that I seemed to need at the time even if it was not the book I went in for.

As it turns out, my trading plans could have been handled in the same manner. Although unlike books, where I know what the other books have to offer, trading plans are not so predictable... I just had to try them all.

My original was the Dividend Re-Investment Plan plan. I had charted long term growth potential based on a few presumptions, forecast best and worst case scenarios and plotted everything for over 30 year periods. The goal was not to create a profit through capital gains, although that would be nice as well, but to produce an income stream based on dividends and eventually through incremental dissolution of the shares if needed. This requires patience and a dogged determination to continually contribute to the plan as it is a long term retirement strategy.

I still have my original holdings for all of the DRIPs that I started, the first being Bank of Montreal, (BMO). In January of 2008 I bought my initial share and promptly sent in my first Optional Cash Payment (OCP) cheque for $300 and registered for the DRIP.

Now that I have some data from this DRIP I can go back and do a performance comparison, which I will do for all of my companies eventually.

My rules were simple. Contribute $300 per month into at least one of the company DRIP plans. Usually the company will purchase shares on my behalf once per month, but plans vary in when this is done. In all cases they use a particular closing figure for the cost and in some cases they may discount re-investment purchases by as much as 5%, (BMO is currently 2%). In order to produce a best and worst case scenario I took the monthly share prices and applied them to my purchase spreadsheet twice. Once was to use only the low values and the other was to use only the high values.

Keep in mind that an active trading plan involves buying and selling where the worst case assumes buying high and selling low which produces a loss right away... even buying and selling at break even eventually erodes the trading account due to arbitrage and commissions. There must be many trades that profit either more frequently than loose or profit much larger than the losing trades. It's not easy to stick to a plan in those cases.

Here is a chart showing the effectiveness of both the best and worst case scenarios for BMO over the last four years.

In an active trading plan the worst case is that all the initial money is lost. In the case of this DRIP, the worst case is a 10% variance in the un-realized gain of the plan overall. This gain is not the primary goal. The real difference is in the regular recurring dividend payments or yield. The overall difference in yields vary by less than 3% (21.4% difference in yields) and the current payment varies by 0.25% (18.1% difference in yields).

It would be reasonably safe to assume that the result would be somewhere in between these two results.

Considering the long term span of this sort of plan it isn't difficult to extrapolate 30 years of similar data. Assuming worst case from above and the current payment of $204 per quarter that is generated after 4 years and applying some simple linear math, the payment could easily be $1,500  per quarter ($6,000 per year). The thing is that this is not a simple continuance as the shares, OCPs and re-investments build on themselves in a non-linear fashion.

Jeff.