And why would I want to opt in or out of it?
The Low Down on Dividend Reinvestment Plans
Dividend Reinvestment Plans or DRP’s are a type dividend (income) distribution option that some share holdings provide to their shareholders.
If you have selected to be paid your dividends via a DRP then your dividend income will be automatically reinvested in purchasing more shares (to the value of the dividend).
Example – If your dividend payment was $50 and the share price was $25 you would have an additional 2 shares added to your portfolio instead of a cheque / or bank deposit of $50.
What options do I have in terms of being paid my dividends?
You can opt to have your dividends paid to you in the following ways:
- Bank Deposit
- Dividend Reinvestment Plan (if offered)
Do all share holdings offer a Dividend Reinvestment Plan?
No. Not all holdings offer the option of a Dividend Reinvestment Plan, and if this is the case you will need to opt for one of the other options to receive your dividends.
That said as DRP’s become more popular I’ve recently noticed a trend where some holdings automatically opt you into the DRP, and you have to opt out of it if you don’t want to participate (example – DHHF ASX | High Growth ETF Australia | BetaShares).
What are the benefits of opting into the Dividend Reinvestment Plan?
- No temptations – This was an important consideration for me. For me being enrolled in DRP means my portfolio is constantly growing, and I’m not tempted to spend my dividend income elsewhere.
- No brokerage fees – There are no brokerage fees passed onto you within a DRP, which is a significant money saver over time as trades can cost upwards of $20 per trade.
- Supports a Dollar Cost Averaging approach – If you subscribe to DRP you are by default opting for a Dollar Cost Averaging approach. This approach suits those who are in it for the long haul, and aren’t trying to time the market. You have no control of the price of the shares you are purchasing within a DRP, and therefore sometimes the shares you receive through DRP will be overvalued and sometimes they will be undervalued at the time you receive them. Regardless the principle around dollar cost averaging is that over time this will even out and won’t be an issue.
- KISS Approach – DRP keeps things pretty simple in terms of managing your income payments, and will suit those who enjoy a hands off approach to investing.
- Compound Effect – DRP is a great way to quickly build and grow your portfolio as each time you are paid a dividend you will receive a larger number of shares than the last pay-out (This is based on the assumption that the dividends are unchanged).
What are the considerations of opting into a Dividend Reinvestment Plan?
- Lack of Control – If you like having a hands on approach to your portfolio and investments then DRP might not suit you. You will not have any control over the price and timing of the purchase of shares under a DRP, which may result in you buying shares at the higher price than you would if you purchased them yourself. That said if you are planning on holding your shares for the long term then the nature of DRP means that the price paid for your shares should even out over time.
- Unbalanced portfolio and/or reduced diversification – DRP involves the automatic purchase of shares in the same holding, which means your portfolio may become unbalanced over time. This can be an issue for those with a portfolio where they manage the balance of asset classes and diversification of holdings.
- Not for short term investors – DRP isn’t recommended for those who are not looking at holding shares for a long period of time. Short term investors would likely be better off opting for a direct payment (bank deposit or cheque) and purchasing additional shares separately.
- Not for those who are dependant on dividends as an income stream – If you are looking at drawing an income from your dividend stream (eg retired) then DRP isn’t for you as any income is turned into shares.
- Record Keeping – DRP requires additional record keeping (sad face). You will need to keep records of the purchase price and dividend payment amount every time a dividend payment is made. Sharesight provide a really great guide here for more information.
So how do I update my Dividend Distribution Options?
Head on over here to an article I wrote on How to opt into a Dividend Reinvestment Plan and it will give you all the deets.
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