Dividend Reinvestment Schemes
We have all heard of the magic of compound interest. How by reinvesting small profits on a regular basis creates an investment that grows exponentially. One of the best easiest ways for the dividend investor to achieve long term compounding is to take the option to reinvest dividends in the company via a Dividend Reinvestment Scheme. Around 200 Australian companies offer shareholders the opportunity to purchase additional shares with their dividend payments, rather than taking it as a cash payment via Dividend Reinvestment Schemes.
An additional benefit is that the additional shares purchased through DRS’s are often purchased available at a discount to the market price. The discount varies but is usually between 1% and 5%.
A final bonus is that you don’t have to pay brokers commission hen reinvesting your dividends. There are very few freebie in the investment game so this is makes the DRS all the more attractive.
For example, take a 10000 share investments in Wesfarmers that payed a fully franked dividend of $0.95 on 28/9/2012. Wesfarmers offers a 2% discount on shares purchased through its DRS. Assuming the price of Wesfarmers shares was $34 at the payment date, the lucky shareholder would receive an additional 9500/(34*0.98) = 285 shares. The 2% discount means he receives 6 extra shares than he otherwise would.
The only possible downsides participating in the DRS is that book-keeping is onerous when determining capital gains tax when you eventually sell the shares. You quite possibly may not want to increase your holding in the company is you consider it overprices or expect it to under perform. In these cases you should taking the cash and invest it elsewhere.
The Australian Financial Review maintains an current list of Australian Dividend Reinvestment Schemes.
The information provided on this website is for use of a general nature only and is not intended to be relied upon as, nor to be a substitute for, specific professional or investment advice. The team at Dividends.com.au are not lawyers, financial planners, investment advisers, or accountants. So, before taking any action or risking any money, you should always check with your own qualified professional advisers.