I am looking to DRIP a U.S. company but I'm not sure it's worth buying stock outside the country given the tax laws and any other hoops I might have to jump through. The company I'm interested in is Coca-Cola. Any advice?
Dividend reinvestment plans (DRIPs) are a great way to build wealth, but you should be prepared to do some extra work if you're venturing south of the border.
To start a DRIP with Coke or any U.S. company, you'll need to acquire your first share(s). There are a few ways to go about this.
The easiest is to go through your broker, who will charge you a commission to buy the share(s). Then you'll have to ask your broker to transfer the stock to your name, which typically costs about $50 on top of the initial purchase commission.
Once you have your share certificates, complete the DRIP enrolment form available at Computershare.com, the website of Coke's transfer agent. (Make sure you select United States as your region, then click on "Investor Centre" and "Buy Stock Direct." Enter Coca-Cola in the search box, and you'll find a link to the enrolment form.)
A second option is to buy your first shares directly from the transfer agent.
Hundreds of U.S. companies, Coke included, offer direct stock purchase plans (DSPPs). Many of these plans charge little or no fees for initial or subsequent purchases. Unfortunately, Coke isn't one of them. You'll have to invest a minimum of $500 (U.S.) for your first shares, and a $10 enrolment fee will be deducted from this amount, plus a fee of 3 cents for every share purchased.
Whether you buy your initial shares through a broker or through Coke's DSPP, your fees won't end there. For every optional cash purchase after that you'll be charged $3 plus 3 cents a share, or $2 plus 3 cents a share if you make automatic deductions from your bank.
But here's where things get tricky for Canadians: Because of U.S. money-laundering laws, you can't send Canadian cheques or make automatic deductions from a Canadian bank. You'll need to send a bank draft or money order (more fees!) or open an account with a U.S. bank (or U.S. subsidiary of a Canadian bank).
Want to reinvest your dividends? You'll pay fees for that, too, equal to 5 per cent of the amount reinvested, up to a maximum of $2, plus 3 cents a share.
To me, all those fees seriously undermine the purpose of opening a DRIP, which is to accumulate shares with little or no transaction costs.
If you aren't wedded to Coke, Computershare administers dozens of other plans with no ongoing fees. Fellow soft-drink maker Dr Pepper Snapple Group, for instance, charges an initial set-up fee of $15 with no further transaction costs, except when you sell your shares.
Another example is Pepsico. Its DSPP and DRIP, administered by BNY Mellon Shareowner Services, charge an enrolment fee of $10 but subsequent purchases and reinvestments are free.
For a complete list of no-fee U.S. DRIPs check out directinvesting.com, which also offers a convenient enrolment service for investors. For a list of U.S. transfer agents, visit tadirectory.com.
For Canadians, taxes on U.S. dividends are another consideration. If you hold your U.S. stocks inside a registered retirement savings plan or other registered retirement account, you pay no tax on your dividends. However, with U.S. DRIPs, you face a 15-per-cent U.S. withholding tax, which means only 85 per cent of your dividend will be reinvested. (You have to send form W-8BEN to the transfer agent to qualify for the 15-per-cent rate, which under the Canada-U.S. tax treaty is reduced from the statutory non-treaty rate of 30 per cent).
You'll also owe Canadian tax on the full amount of the U.S. dividend, although you can usually apply that initial 15-per-cent hit as a foreign tax credit, which means you'll be paying tax on your U.S. dividends at the same rate as interest.
U.S. DRIPs have their benefits. But are all the fees, paperwork and taxes worth it, particularly when many Canadians can buy and sell U.S. stocks in their brokerage accounts for $10 or less without all the hassles?
Robert Gibb of Victoria, who DRIPs several U.S. stocks including Coke, Pepsi, Pfizer and Abbott Labs, says U.S. DRIPs aren't for everyone. But they're ideal for those who want to invest small amounts at a time and don't mind doing a bit of work.
"I think it's great for me, but it's a personality thing," he says. "The paper work is kind of like riding a bicycle. It's a little bit rough when you first get on, but once you've got it, it's easy."