The Benefits of Compounding via DRIP

March 15, 2022

The Harvest Distribution Reinvestment Program (DRIP) reinvests income paid to unitholders by an ETF into that same ETF. That allows unitholders who don’t need the cash generated by their ETF to seamlessly benefit from the power of compounding through a Harvest DRIP Plan, without incurring additional trading charges.

A DRIP is a practical way to grow your investments as your distributions will stay in the market, rather than being taken out as cash, and you save on trading fees.

Investors may opt into the DRIP program through their financial advisor or by contacting their brokerage firm.

The benefits of Compounding via DRIP

Let’s use a generic example to demonstrate the mechanics of a DRIP that power compounding. In this case, you just bought 1,000 units of an equity income ETF for $10 each, totaling $10,000, and that hypothetical ETF pays an annualized yield of 8.5% in monthly distributions.

  • In January, you would receive $70.83 in income which, in a DRIP plan, would be added to your principal investment for a total of $10,070.83.
  • That means your February income is $71.34, and your principal is worth $10,142.17.
  • March income is then $71.84 bringing the principal to $10,214.01.
  • April income is then $72.35 and your principal at the end of the quarter is worth $10,286.45.

At the end of the year this hypothetical investment in a static market would be worth $10,883.91 thanks to the income yield compounded via DRIP. After ten years it would be worth 23,326.47. After 20 it would be worth $54,412.43.

That is the power of compounding, and over a long enough time horizon it turns into greater wealth.

Are Harvest ETF’s eligible for DRIP?

Canadian residents can participate in the Harvest DRIP plan in the following ETF’s:

What is the tax treatment for DRIPs in Canada?

DRIPs reinvest distributions to purchase additional units. Because there is a cash distribution reinvested, it is considered as income and therefore taxable, unless held in a tax-sheltered investment account. Please consult your tax advisor for additional advice.

How are units bought or sold?

Units purchased or sold under the DRIP plan are purchased through the Toronto Stock Exchange (TSX) by the DRIP Plan Agent. The price of the units purchased or redeemed is based on the average price of all the units in respect to a given distribution payment date. The units will be allocated pro rata based on their respective entitlements to the distributions used to purchase units.

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