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Dividend Reinvestment Plans

Discussion in 'Beginner's Lounge' started by Crafty, Jul 16, 2007.

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  1. Crafty

    Crafty

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    Hi all,

    Just after some opinions on dividend reinvestment plans...

    For long term investment are they a good idea?

    What are the disadvantages?

    Cheers...
     
  2. brettc4

    brettc4

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    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
     
  3. DionM

    DionM

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    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.
     
  4. Charlie

    Charlie

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    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.
     
  5. bryan_palmer

    bryan_palmer

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

    DionM

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    I count them as the same value as the original share price ...
     
  7. apra143

    apra143 Hash

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    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).
     
  8. Julia

    Julia In Memoriam

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    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.
     
  9. doctorj

    doctorj Hatchet Moderator

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    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?
     
  10. son of baglimit

    son of baglimit

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    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.
     
  11. DionM

    DionM

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    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 :)
     
  12. Garpal Gumnut

    Garpal Gumnut

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

    Garpal
     
  13. Rainmaker2000

    Rainmaker2000

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    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
     
  14. Whiskers

    Whiskers It's a small world

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    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.
     
  15. nioka

    nioka

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    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.
     
  16. Julia

    Julia In Memoriam

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    Thanks for clarifying that, Nioka.
     
  17. DionM

    DionM

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

    Sounds like you have about the same number of Boral shares as me? ;)
     
  18. Duckman#72

    Duckman#72

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    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
     
  19. awg

    awg

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    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
     
  20. intheblack

    intheblack

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    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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