Dividend Reinvestment Plans

[nioka]

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.

 

[Gary]

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

 

[m1ch43l8]

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?

 

[McLovin]

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.

 

[So_Cynical]

Re: 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?

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.

 

[Bill M]

Re: dividend reinvestment

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.

 

[pixel]

Re: dividend reinvestment

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.

 

[kid hustlr]

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?

 

[robusta]

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?

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

 

[robz7777]

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..

 

[So_Cynical]

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.

 

[Tyler Durden]

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?

 

[So_Cynical]

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.

 

[skc]

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%.

 

[kid hustlr]

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

 

[kid hustlr]

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%.

nice example skc

 

[Knobby22]

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.

 

[chops_a_must]

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

 

[McLovin]

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.

 

[So_Cynical]

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.