One of the downsides of exchange-traded funds (ETF) compared to mutual funds when investing in the stock market used to be that you could not automatically reinvest your dividend/interest distributions. This meant that you ended up with money sitting in your account until you purchased more shares, but the commissions on each purchase didn’t always make it economical to do that often.

It is now possible to subscribe to Dividend Reinvestment Plans with several Canadian providers, but it is necessary to contact your broker for that (assuming they support it). I couldn’t easily find information on how to do that with Scotia iTrade in December, so I figured I’d now post about it in case it could benefit other people.

Here’s what they told me when I inquired about the procedure:

You can enroll your securities on DRIP by calling in and speak to a representative. You need to provide them the list of securities you want to enroll and the account number these securities are settled in. Alternatively, you can email this information to us. Please be advised: To qualify for DRIP, the dividends received must be enough for one additional share. We do not give fractional shares. We cannot enroll future securities in DRIP. Once new securities are settled in your account, you can give us instructions to enroll them on DRIP.

For further assistance, please contact us at 1-888-872-3388 or (416) 214-6457 from 8am to 9pm ET weekdays or 8am to 6pm ET weekends.

I therefore emailed them at service@scotiaitrade.com to request that they enroll my Vanguard and iShares ETFs on DRIPs and they did so the next day.

How do the DRIPs work?

Once your securities are enrolled to DRIPs, you’ll get as many full ETF shares as the dividends allow you to buy, and the remaining amount will be deposited as cash in your account. For example, if the stock trades for $25 and you get a $49 dividend, you’ll get 1 more share + $24, while if you get a $51 dividend, you’ll get 2 more shares + $1. This is because ETFs cannot issue partial shares.

Because of that, there’s a minimum holding amount under which DRIPs won’t help much, and it varies by ETF. For example, XBB has a monthly distribution of approximately $0.085 per share, and a share price of $31.26 as of 2013-01-03. This means that you would need a minimum of about 368 ($31.26/$0.085) XBB shares to get one new share as part of the DRIP. Canadian Couch Potato has an interesting post with examples for those who’d like to learn more about this.

Here’s an example with 566 shares of XBB. Note that the proportion of the distribution that gets reinvested is about 65% in this case ($31.26/$48.02), but it could be larger with more shares, or if the distribution was higher.