# Dividend Reinvestment Plans



## Crafty (16 July 2007)

Hi all,

Just after some opinions on dividend reinvestment plans...

For long term investment are they a good idea?   

What are the disadvantages?

Cheers...


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## brettc4 (16 July 2007)

My personal belief for long term investments they are fine.

They allow you to add to your number of holdings over time, and due to compunding, you will received (in theory) additional dividendends the next year, in dollar terms only.
You may also get a discount on the price, always handy.

The potential downsides are far as I see them are:
1. If you want to sell but haven't been allocated your shares even though you will be allocated them, you need to cancel the Dividend reinvestment plan, or you could be left with an unmarketable parcel. If you are trading long term, not such an issue.

2. We all hope our share price goes up, so although in dollar terms your dividend may increase, the number of shares you get allocated may actually decrease.

3. Capital gains tax becomes harder to work out as those additional shares have their own starting date, so when you do seel, some of your Holding (if over 12 months) with get the CGT 50% benefit, but a small portion will not.  If you are doing your own tax, you may want to take into account how much effort it would take to accurate calculate capital gains tax over say 10 years with 2 dividends a year, thats 20 different start dates.

All that being said, I am currently doing this with my ANZ shares as I plan on holding these over then next 15-20 years, provided banks are still as poriftable as they are today.

Brett


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## DionM (17 July 2007)

I use them as you don't have to pay brokerage, and over time your holdings should theoretically grow.  I have no need for the dividend paid (at this point in time, it's only a couple of hundred $ on my shares anyway) so might as well reinvest.


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## Charlie (22 July 2007)

PRO: 
great for investors who want an "automatic reinvestment plan", can top up without broker fees

Usually a discount to market price (but some companies are more shareholder friendly and make it a discount to market price in the days AFTER it goes ex div, but most are a discount to price days leading UP to ex-div date).

CON:
they are at current market price (less a small discount). I have to ask myself "if I were looking at this company for the first time, would I want to buy at these prices". Frequently the answer is a resounding NO.

As already mentioned, it can make  record keeping and tax a bit more complicated.


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## bryan_palmer (16 September 2007)

Stupid question: if you are allocated shares under a DRP how do you adjust the average cost per share for your portfolio?


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## DionM (16 September 2007)

bryan_palmer said:


> Stupid question: if you are allocated shares under a DRP how do you adjust the average cost per share for your portfolio?




I count them as the same value as the original share price ...


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## apra143 (16 September 2007)

Crafty said:


> Hi all,
> 
> Just after some opinions on dividend reinvestment plans...
> 
> ...




Whilst this is an example only: my folks put down $10k with a managed fund account at the end of 2004.

Dividends received between Jan-Dec, rounded to nearest hundred:

2005 dividend (NOT re-invested) == $1700
2005 Capital LOSS (had they sold in Dec) ==  -$900*


2006 dividend (re-invested) == $1700
2006 Capital GAIN (had they sold in Dec) == $2600*


2007 dividend so far (still being re-invested) == $2800 
2007 Capital GAIN (if everything sold right now) == $7000*

* From original $10k

Since I'm new to all this and haven't looked at the taxes charged; I'm not entirely sure if it's been a good or bad overall performer (which I usually judge by comparing against an ING savings maximiser account instead).


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## Julia (16 September 2007)

DionM said:


> I count them as the same value as the original share price ...




Why would you do that?
Surely you'd record them at the price they were in the market on the day they were allocated?

However, I've never participated in Dividend Reinvestment Plans so perhaps there might be some special rules which apply.

I'd be interested in clarification from Rozella or someone else who knows about this.


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## doctorj (16 September 2007)

I've wondered about the logic behind DRP's for some time.  When a company pays a dividend, in a sense they're saying they don't have any (or enough) quality investment options at the moment and don't expect to in the forseeable future, so the individual investor is likely to generate at higher ROC than the company.

So why give the money back to them?

I guess the counter arguement is that many 'blue chip' companies pay dividends because they're expected to and that a stable dividend is seen as a sign of good management so perhaps its not so bad at all.

Do many here reinvest dividends?


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## son of baglimit (17 September 2007)

before my recent sell off of most holdings (and at top prices thankfully), they were in DRP's over many years. 

1. the calculations upon selling aint hard, just take a few mins each.
2. the DRP was great in allowing me to build the holding when the cash generated by the div wasnt required.
3. very handy for those high yielding stocks, and even more so when those few companies that dont frank their divs have a DRP, cos youll increase your holdings quicker (yes you still have to pay the tax, i know).

i managed to increase my large holding in TAH by over 25% in 3 years (when DRP was introduced), before acting a few months ago and selling on the day they set record highs  ($18.70). additional calcs were done for CGT because of the many 'purchases' made thru the DRP, but its very simple maths several times, thats all.


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## DionM (19 September 2007)

Julia said:


> Why would you do that?
> Surely you'd record them at the price they were in the market on the day they were allocated?




Just philosophy I guess; it's just more shares and to me, might as well do it at the cost I actually paid.  I could also record them as $0 cost, as that's 'effectively' what it cost me (nothing) since I didn't see or spend the dividend some other way


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## Garpal Gumnut (21 September 2007)

Julia said:


> Why would you do that?
> Surely you'd record them at the price they were in the market on the day they were allocated?
> 
> However, I've never participated in Dividend Reinvestment Plans so perhaps there might be some special rules which apply.
> ...





As your portfolio grows, unless you do your own tax return, the accountancy fees will be greater if you use DRP's.

Garpal


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## Rainmaker2000 (21 September 2007)

Dionm, I guess you can work out the cost base on the new shares how you like, but the tax man has a very definite idea about these things.........more broadly, the thing I love about DRPs that I've never seen anyone write about is the 'rounding effect'.....this puts DRPs over the line for me especially as a relatively small investor........I love nothing more than buying a stock, say for $7 and it pays a dividend....the dividend will of couse never buy an exact amount of shares.....while companies differ on this policy, I just love it when say a $30 dividend buys 5 shares worth $7...its just another thing the small investor has over the pros


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## Whiskers (21 September 2007)

doctorj said:


> I've wondered about the logic behind DRP's for some time.  When a company pays a dividend, in a sense they're saying they don't have any (or enough) quality investment options at the moment and don't expect to in the forseeable future, so the individual investor is likely to generate at higher ROC than the company.
> 
> So why give the money back to them?
> 
> ...




Not an issue for me cos I mainly go for capitol growth in the mineral explorers and emerging producers atm. I'm generally loath to participate in DRP's anyway, mainly because of the mess it makes when keeping account of your holding and tax returns. The extra time and cost is just not worth the trouble for me.

My retired mum only has div paying shares and she wants her regular divs, partly to supplement her income, but mainly she worries that a big chunk of her capitol could disappear in a market fall. She was offered some DRP's but not only turned them down, but when she got me to do the sums, she found that now that the share market is slowing down and interest rates rising, she can get a better return on most if she sold the shares and invested the cash and collected the interest. Being in her 70's she felt more comfortable with the cash too.


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## nioka (21 September 2007)

Julia said:


> Why would you do that?
> Surely you'd record them at the price they were in the market on the day they were allocated?
> 
> However, I've never participated in Dividend Reinvestment Plans so perhaps there might be some special rules which apply.
> ...




Any time I have received shares as a dividend reinvestment they have been valued by the company according to the SP averaged for a specific period. If they were not valued how would the company know how many to issue as payment for the dividend. You can also get the franking credits associated with the dividend. Of course you can reinvest any dividend yourself simply by buying more shares.


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## Julia (21 September 2007)

Thanks for clarifying that, Nioka.


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## DionM (21 September 2007)

Rainmaker2000 said:


> Dionm, I guess you can work out the cost base on the new shares how you like, but the tax man has a very definite idea about these things.........




Oh true, of course.  It's just how I do it myself.



> I just love it when say a $30 dividend buys 5 shares worth $7...its just another thing the small investor has over the pros




Sounds like you have about the same number of Boral shares as me?


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## Duckman#72 (21 September 2007)

The key to DRP is the compounding effect of rolling over the shares.

I have seen people who were issued 150 CBA shares originally as employees of the bank who now hold over 400 shares through Dividend Reinvestment.

The question is "what else are you going to do with the dividend cheque?" The majority of people are not going to miss $30-$100. Why not throw it into more shares. Realistically you are not going to invest that money anywhere else.  

The shares should be valued according to the DRP plan. It is not that difficult to do. A lot of companies have a DRP calculator - eg RIO. Just log onto their website.  

Duckman


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## awg (25 September 2007)

This is my first post..a test.

I liked DRP plans when you got a 2.5% discount, also no brokerage fees.

What I really did not like, is when transferring to my SMSF, after 17 yrs of holding, I found some of my records misplaced, so calculating CGT is a nightmare.

This needs to be considered..we all must die sometime. Our inheritor then must calculate CGT.

It is very difficult to assume all records will be perfectly kept for 40yrs...computer drives die, fires,flood , theft, slackness all can occur.

It can cost a bit to get the records form the Register

regards tony


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## intheblack (15 October 2007)

bryan_palmer said:


> Stupid question: if you are allocated shares under a DRP how do you adjust the average cost per share for your portfolio?




To adjust the cost, you simply divide your initial outlay by the increased number of shares.  For example: if you bought 100 shares at $1 each (initial outlay of $100), and were issued 5 shares in the DRP, your cost basis per share is $100 divided by 105 = $0.9524.  That's how I do it, anyway.


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## nioka (15 October 2007)

intheblack said:


> To adjust the cost, you simply divide your initial outlay by the increased number of shares.  For example: if you bought 100 shares at $1 each (initial outlay of $100), and were issued 5 shares in the DRP, your cost basis per share is $100 divided by 105 = $0.9524.  That's how I do it, anyway.




I think you will find that is not the correct way to do it. The shares are issued in place of the dividend.which has a value in itself. The shares are valued at that value which could be much higher than the average purchase price. The statement you get from the company issueing the shares should show a value. It is usually calculated by the company on the average selling price for a number of days prior to them being issued.


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## Gary (20 October 2007)

Hello, This is my first post.

I have found DRPs a great way of capitaising on our investments. Each time you recieve a statement it sets out how many new shares you have recieved and at what is the base cost of thoses shares. 

All that is required is very disiplined record keeping, I run a spreadsheet with as much info as possible entered. It is not dificlut and believe me, I hate paperwork.

With DRP, our $4000.00 CBA shares bought in 1998 are now worth $20,000.00, we have a portfolio of seven blue chip shares and the more that are DRP the happier we are. 

Strongly recommend DRPs


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## m1ch43l8 (24 November 2011)

*dividend reinvestment*

Hi all,

pretty nooby question so sorry just want to get some opinions.

Whats everyones opinion on using dividend reinvest programs is it better to have it paid in your account and then wait for prices to drop then reinvest or better to avoid broker fees and have it reinvested also do prices jump up when dividends are paid out?


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## McLovin (24 November 2011)

*Re: dividend reinvestment*

Depends on the size of the dividend. If you're dividends are low dollar value then the brokerage cost of reinvestment might make it not worthwhile. If on the other hand you are receiving decent sized dividends then you'd be better off doing it yourself and timing it a bit better.


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## So_Cynical (24 November 2011)

*Re: dividend reinvestment*



m1ch43l8 said:


> Hi all,
> 
> pretty nooby question so sorry just want to get some opinions.
> 
> Whats everyones opinion on using dividend reinvest programs is it better to have it paid in your account and then wait for prices to drop then reinvest or better to avoid broker fees and have it reinvested also do prices jump up when dividends are paid out?




I have a policy of participating in DRP's when shares will be issued at, below or slightly above my average highest priced parcel of shares.... personally i don't see the point in averaging up but do concede that in the right stock it can work out well.


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## Bill M (4 December 2011)

*Re: dividend reinvestment*



m1ch43l8 said:


> Whats everyones opinion on using dividend reinvest programs is it better to have it paid in your account and then wait for prices to drop then reinvest or better to avoid broker fees and have it reinvested also do prices jump up when dividends are paid out?



I get all my dividends paid in cash into my account. The reason for this is because that from the time the share goes ex dividend the share price might go up to a price where I might think it's not worth reinvestment and it is beyond your control. In other words I might have to pay too much for that particular stock. I prefer to pay my $20 or $30 brokerage and buy what I like when I like in the parcel size that I want. Having dozens of separate small buy parcels once you have sold the stock can give you a bit a capital gains headache too, just my opinion.


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## pixel (4 December 2011)

*Re: dividend reinvestment*



Bill M said:


> I get all my dividends paid in cash into my account. The reason for this is because that from the time the share goes ex dividend the share price might go up to a price where I might think it's not worth reinvestment and it is beyond your control. In other words I might have to pay too much for that particular stock. I prefer to pay my $20 or $30 brokerage and buy what I like when I like in the parcel size that I want. Having dozens of separate small buy parcels once you have sold the stock can give you a bit a capital gains headache too, just my opinion.



 my approach exactly.
Even if the DRP gives you a small discount - around 5% - that's peanuts compared to finding a Low price at support, where it's worth stocking up seriously; or, as Bill says, sell at resistance, which sometimes is a couple of days before the dividend is paid and the additional handful of shares get distributed. It's also worth mentioning that the dividend still has to be included in the tax return. So all you save is brokerage and a couple of points off the price in return for someone else telling YOU when and at what price you have to buy.

Summary: 
I prefer to buy on my own terms; not when the company happens to allot the DRP shares.


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## kid hustlr (4 January 2012)

Hey guys, speaking of DRP's:

I recognise that from a shareholders perspective, whether investors choose to take a DRP or the cash payment will, in theory, lead to the same reduction in share value.

Yet how does a DRP influence a company's balance sheet?

Remembering A = L + OE

My understanding is that a cash dividend is recorded by reducing retained earnings (OE) and reducing cash (A)

But with a DRP we reduce retained earnings (OE) and increase 'paid in capital' (OE) leading to a no change in OE or the overall balance sheet.

If the above is correct does this not influence ratios such as EPS and the like?

Put another way: if the same 2 companies performed exactly the same year on year but one company allowed a DRP and the other did not, the one which did not would have a far greater EPS?


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## robusta (4 January 2012)

kid hustlr said:


> Hey guys, speaking of DRP's:
> 
> I recognise that from a shareholders perspective, whether investors choose to take a DRP or the cash payment will, in theory, lead to the same reduction in share value.
> 
> ...




Depends on the return the company with the DRP gets with that extra retained capital.


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## robz7777 (4 January 2012)

robusta said:


> Depends on the return the company with the DRP gets with that extra retained capital.




The capital isn't retained tho is it? It is either paid out to the investor or spent purchasing the shares and then transferred to the shareholder? So either way cash is reduced.. 

Another options that the company has (should they have surplus cash with little to spend it on and dont want to increase the dividend) is to purchase their own shares on market and cancel them - effectively increasing EPS per share for remaining shareholders. 

That is my understanding of how DRPs work..


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## So_Cynical (4 January 2012)

robz7777 said:


> The capital isn't retained tho is it? It is either paid out to the investor or spent purchasing the shares and then transferred to the shareholder? So either way cash is reduced..
> 
> That is my understanding of how DRPs work..




Most company's running DRP's issue new shares...in my limited experience i only know of 1 company buying shares on market for its DRP.


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## Tyler Durden (4 January 2012)

So_Cynical said:


> Most company's running DRP's issue new shares...in my limited experience i only know of 1 company buying shares on market for its DRP.




Interesting, I was thinking about this issue a few days ago. If as part of a DRP, the company issues new shares, doesn't that dilute the already existing shares?


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## So_Cynical (4 January 2012)

Tyler Durden said:


> Interesting, I was thinking about this issue a few days ago. If as part of a DRP, the company issues new shares, doesn't that dilute the already existing shares?




Correct...however as usually only 30 > 40% of share holders participate in DRP's the dilution is not to bad, throw in the odd buy back and the impact is even less over the long term.


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## skc (5 January 2012)

Tyler Durden said:


> Interesting, I was thinking about this issue a few days ago. If as part of a DRP, the company issues new shares, doesn't that dilute the already existing shares?




Dilution depends on the price at which the new shares are issued. Your typical DRP is only 2-3% discount to some VWAP over some period. Each dividend is at most 3-4% of the market cap, and with 30-40% participation rate, the dilution (if any) would be minimal.

A rough example.

Before DRP... shares on issue = 100m, share price = $1, earnings = $10m, EPS = 10c. ROE = 10% (say). Dividend @ 5c. DRP price = $0.94. Participation rate = 40%.

Dividends paid out = $5m.
DRP funds back into the company = $2m.
New shares issued at 94c = 2.1277m.

After DRP

Total shares on issue = 102.1277m.
Additional earning from DRP funds = $0.2m.
Total earning = $10.2m.
EPS = 9.987cps.

Dilution = -0.13%.


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## kid hustlr (5 January 2012)

robusta said:


> Depends on the return the company with the DRP gets with that extra retained capital.




I slept on this and it now makes sense.

Effectively the company with the DRP will have a 'bigger balance sheet' (higher cash, higher OE) and therefore if they are making use of this extra funds to create more earnings then it could be seen as a benefit I guess.

cheers guys


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## kid hustlr (5 January 2012)

skc said:


> Dilution depends on the price at which the new shares are issued. Your typical DRP is only 2-3% discount to some VWAP over some period. Each dividend is at most 3-4% of the market cap, and with 30-40% participation rate, the dilution (if any) would be minimal.
> 
> A rough example.
> 
> ...




nice example skc


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## Knobby22 (5 January 2012)

Yes, you will get more dilution from the board and CEO issuing themselves millions in options.

That's one reason companies have "capital management" otherwise the earnings per share get diluted.


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## chops_a_must (10 May 2013)

This may seem like a stupid question, I've never really given much thought to DRPs. There are no stupid questions, just stupid people and all that...

But what happens to the franking credit in the DRP? Is that calculated in the DRP purchase, or is it just calculated at tax time?

Cheers


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## McLovin (10 May 2013)

chops_a_must said:


> This may seem like a stupid question, I've never really given much thought to DRPs. There are no stupid questions, just stupid people and all that...
> 
> But what happens to the franking credit in the DRP? Is that calculated in the DRP purchase, or is it just calculated at tax time?
> 
> Cheers




The DRP is only on the cash amount of the dividend. A franking credit merely represents tax already paid.


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## So_Cynical (10 May 2013)

chops_a_must said:


> This may seem like a stupid question, I've never really given much thought to DRPs. There are no stupid questions, just stupid people and all that...
> 
> But what happens to the franking credit in the DRP? Is that calculated in the DRP purchase, or is it just calculated at tax time?
> 
> Cheers




You still get the franking credits, i treat the new shares issued under a DRP as a new share transaction for tax purposes..you still pay tax on the money received even though you didn't really receive it.


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## chops_a_must (10 May 2013)

So_Cynical said:


> You still get the franking credits, i treat the new shares issued under a DRP as a new share transaction for tax purposes..you still pay tax on the money received even though you didn't really receive it.




Thanks.

Yeah, that's what I wanted to know.


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