Think of it Like This: DRIPs, Dividends and Stock Splits

Some investing concepts can take a minute to learn, but a lifetime to master. Just look at DRIPs, which let you automatically grow certain securities. Then there's dividends¹. They may sound simple enough, but do you know if a company pays a dividend (hint: check your detailed quote page), whether you're eligible to receive them, or when you can expect a payout? Plus, a knowledge of stock splits may reduce the surprise if you discover your investments have spontaneously doubled (or tripled) overnight.

Read on for analogies that can help you familiarize yourself with these investing concepts.

Think of a DRIP like this…

Electric blue forget-me-nots and bright red poppies are a dazzling sight. The best part? These self-seeding perennials multiply on their own, sparing savvy gardeners the work of replanting year after year.

That's a lot like how Dividend Reinvestment Plans², or DRIPs, work for investors with eligible securities. With a DRIP, dividend income is automatically reinvested into more shares or units, and the longer you keep those shares or units, the more dividends you acquire and the more your investments get to grow if all goes according to plan. Similarly, with self-seeding perennials, you can watch your garden expand with those beautiful blooms over time without ever having to lift a (green) thumb. You just need the weather to cooperate!

Of course, over the long term, you could end up with more shares or flowers than you planned – which could mean drifting away from your ideal mix – in which case a pruning may be in order.

Learn more in What is a DRIP?

Think of dividend dates like this…

You've been invited to a party and, as luck would have it, your host is famous for giving out great favours to those who attend. Like a soiree event, dividend-paying companies give shareholders a little extra for their investment.

Announcement date: Like a "save the date" preceding an invitation, a company announces the date on which it expects to pay the dividend to eligible shareholders.

Ex-dividend date: The ex-dividend date, or ex-date, is like a party's RSVP deadline. Invitees who respond on or after the specified date may still be added to the guest list, but will miss out on receiving a parting gift and other favours. Similarly, if a shareholder buys a stock on or after the ex-date, they become a shareholder, but forfeit the right to receive the upcoming dividend. (They will receive subsequent payments if they continue to own the shares.) Only investors who purchased one or more business days prior to the ex-date are eligible for the dividend payout.

Record Date: Party planners finalize the guest list after the RSVPs have all been counted. Similarly, a company's record date is the cut-off for determining the list of shareholders eligible for the dividend.

Payment Date: It's party time! The festivities end with guests taking home party favours – not unlike how eligible shareholders receive their dividend cheques on a company's payment date.

Think of a stock split like this:

You have a large chocolate bar that costs $10. Some people may be willing to pay that much, but you figure you'll attract more buyers and make it easier to sell if you offer smaller chunks for less. You could try a 2-for-1 split (two pieces at $5 each), 4-for-1 (four pieces at $2.50 each), or even 10-for-1 (10 pieces at $1 each). However you split it, you haven't created more chocolate or changed the bar's overall value, but there are more pieces out there.

In much the same way, a company may split its stock if it feels its share price has increased significantly and wants to make the stock more affordable. The most common stock split is 2-for-1, which doubles the number of shares, halves their price and increases liquidity – the ease with which the stock can be bought and sold. Stock splits impact dividends, too. For example, if a company paid $1 per share, the dividend will become $0.50 per share following a 2-for-1 stock split.

Find out more in Stock Splits Explained and Reverse Stock Splits Explained.

Hungry for more investing knowledge? The previous edition of Think of it Like This can help deepen your understanding of short squeezes, SPACs, and market and limit orders.