If you are new to investing and want to participate in your holdings Dividend or Distribution Reinvestment Plan (DRP) then this post is for you.
When I first dipped my feet into investing I had absolutely no idea how to do anything. Taking the step to buy my first ETFs (Exchange Traded Funds) in the first place took me long enough. Once I bought my first ETF units I wanted to participate in the holdings DRP, and have my income automatically invested in buying more ETF units.
When you purchased your first shares you may have been sent information from your broker recommending you to register your shares via an online Share Registry Company. This may be via a company named Computershare or via another online Share Registry Company (there are quite a few out there including Link Market Services).
Your broker may have even set up an account already for you – so double check your emails.
You will need to have a Computershare Account or other Share Registry Company Account to set up your DRP.
What is Share Registry Companies like Computershare?
Share Registry Companies like Computershare and Link Market Services provide share registration services including transfer of shares, tax reports, dividend/ distribution income reports, and the ability to update how and where you would like your income to be paid.
How to opt into the DRP?
Opting into a DRP is quite straight forward once you’ve set up your Share Registry Account.
Below I’ve detailed how to opt in to DRP via your Computershare Account
(Please Note: The process will be slightly different for other Share Registry Accounts).
The Low Down on Dividend (or Distribution) Reinvestment Plans
Dividend (or Distribution) Reinvestment Plans otherwise known as DRP’s are a type income distribution option that some share holdings provide to their shareholders.
If you own shares then the DRP will be referred to as a Dividend Reinvestment Plan (as shares are paid dividend income).
If you own ETF units then the DRP will be referred to as a Distribution Reinvestment Plan (as ETF units are paid distribution income).
If you have selected to be paid dividends or distributions via a DRP then your income will be automatically reinvested in purchasing more shares or ETF units (to the value of the dividend or distribution).
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 or distributions?
You can opt to have your dividends or distributions paid to you in the following ways:
Dividend (or Distribution) Reinvestment Plan (if offered)
Do all share holdings offer a DRP?
No. Not all holdings offer the option of a DRP, and if this is the case you will need to opt for one of the other options to receive your dividends/distributions.
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 DRP?
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 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 DRP?
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/ distributions as an income stream – If you are looking at drawing an income from your dividend/ distribution 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/distribution 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 Income Distribution Options?