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How Dividend Reinvestment Plans Benefit Investors
By John | September 4, 2010
A dividend reinvestment plan offers shareholders the opportunity to repurchase new fully paid ordinary shares in a company, rather than take their dividend payment as a cheque.
The principal benefit is that extra shares purchased through the plan are generally available at a discount. One of the great advantages of dividend reinvestment plans or DRPs is that the shares are usually offered at a discount to the recent market price. Normally the discount is between two and five percent, but can be as high as ten percent
Another benefit is that shareholders don’t have to pay brokerage when reinvesting their dividends. This is great as you can build up your stake in the company at no additional cost.
As an example, say you owned 500 shares in a stock which has just paid an interim dividend of $1.00 cents per share. The shares are valued at $50 each and are offered at a five percent discount in the dividend reinvestment plan. So you could take $500 in cash, or you could increase your stake in the stock by 10 shares (The dividend payment of $500 being divided by the discount price of $47.50). The next time the company pays a dividend, you will receive an additional 10 allotments of that dividend (taking your total dividend allotments to 510), further increasing your stake in the company and indirectly forcing you to save.
Remember to keep your distribution statements so that you can calculate any capital gains tax liablility on selling the shares. You should also consider whether you want to increase your holding in the company. It may be over priced, or you expect it to underperform. In which case you may be better off taking the cash and investing it elsewhere.
It is important to consider your own position when deciding whether or not to participate in a dividend reinvestment plan. If you are not going to notice the dividend payment, or are likely to spend the cash, then dividend reinvestment plans can be a great way to purchase discount shares, save on brokerage and force you to save. However if the cost of keeping tax records on all your dividend reinvestments is going to be prohibitive, or you could invest the dividend better in another share, then perhaps you should avoid avoid. In short, a dividend reinvestment plan is a discount method of accumulating extra shares.
Topics: Investing |
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