Dividend Reinvestment Plans

[jim_bar]

I am interested if anyone knows a good site to go to which has listed all the companies that have dividend reinvestment plans ?

 

[mista200]

yes good question, i think dividend reinvestment plans are the way to go if you only have a small number shares. im pretty sure most companies have that option available, although im not sure.

 

[money tree]

careful, they bite:

Shareholders who elect to reinvest dividends under the DRP are taxed in Australia as though a cash dividend is paid to them and the dividend is then applied to acquire shares. Accordingly, participating shareholders who are individuals will be required to include the amount of the cash dividend which is applied to pay up the shares issued and any associated franking credits in their assessable income. The franking credits offset tax payable on the income of such shareholders.

For Capital Gains Tax purposes, shares issued under the DRP will have a cost base equal to the amount of the cash dividend entitlement which is reinvested. Shareholders may be subject to tax on disposal of the shares depending on the sale proceeds received and the cost base of the shares.

 

[money tree]

http://www.egoli.com.au/clientservices/documents/generaldocuments/DRP_PLANS_REPORT.pdf

 

[mit]

One advantage of DRP is that you are accumulating shares without extra brokerage. Some comanies also offer a share discount. Is this discount taxable?

MIT

 

[money tree]

sometimes get 2.5% discount (cost base discounted)

example 1:

- $10,000 shares @ $10 (1000)
- divs $700
- $300 franking credits
- shareholder 30% tax bracket

reinvestment plan takes $700, buys 71 shares @ $9.75 (discounted 2.5%)
shareholder tax liability $1000 ($300) less $300 franking credits = $0 tax to pay. There is a capital gain of 25c/share which will be realised at some stage, and remember the cost base is CASH divs not gross, so you get double taxed....after 5 years you have 1414 shares with $128 in discount profits. Return is 42.7%


a better investment is in self funded instalment warrants.

the divs pay off the balance of the loan, you dont receive the divs but you do receive the franking credits.

example 2:

- $10,000 instalment warrants @ $5 (2000)
- divs $1400 (kept to pay the loan)
- $600 franking credits
- shareholder 30% tax bracket

shareholder tax liability $600 ($180) less $600 franking credits = $420 tax refund. Lets say the shareholder uses this $420 to buy more instalments:

420 / 5 = 84

after 5 years you have 2369 instalments (which have risen in value to $8 as the loan was paid back) and $2762 in tax refunds (comparing to discount profits). Also there are other tax breaks for prepayment of interest which I have ignored. Return is 89.6%

 

[sammy84]

Hi jim_bar,

I'm not allowed to recommend a site to you as previously i received an infraction for "spamming"

Regards,
John

You're responding to a psot from 2005

Really desperate to get you're signature out there I take it.

 

[avexdevil]

i apologise if this strays from the OP's topic, but how would one determine dividend returns from a company say CBA?

On ASX, it states div amt is 132c (1.32) payable on each share on 01/04/11. Using the last closing share price of $49.52, the roi is only 1.32/49.52 = 2.665%. Even if it was already franked, a 30% increment to that amount would make it 3.8% return, still less than what you would get at a bank with a 6.5% interest p.a (4.5% return post 30% tax).

i was under the impression most dividends have a higher return than bank interest, am I reading this numbers wrongly or is the market just in a bad place right now?

 

[Tyler Durden]

i apologise if this strays from the OP's topic, but how would one determine dividend returns from a company say CBA?

On ASX, it states div amt is 132c (1.32) payable on each share on 01/04/11. Using the last closing share price of $49.52, the roi is only 1.32/49.52 = 2.665%. Even if it was already franked, a 30% increment to that amount would make it 3.8% return, still less than what you would get at a bank with a 6.5% interest p.a (4.5% return post 30% tax).

i was under the impression most dividends have a higher return than bank interest, am I reading this numbers wrongly or is the market just in a bad place right now?

That's my thinking too - would be interested to see responses.

 

[bellenuit]

I am not sure I understand this. It seems to be saying that DRP will leave the shareholder in a somewhat more disadvantaged tax situation, but I've read the above over and over again, and can't see the difference between DRP and receiving my cash dividend then buying shares with it, with respect to the tax aspect.

You are correct. The tax treatment is the same whether you take the dividend in cash or re-invest it in the DRP.

One negative that some analysts give against DRPs is that people tend to enrol and forget, accumulating more shares as the years go by. Some say that is bad decision making and that you should always actively assess whether to invest more in the company every time you get a dividend. Perhaps the best decision may be to hold off purchasing more (if the shares have become overpriced) or instead invest the dividend in some other company's shares.

That's my thinking too - would be interested to see responses.

Remember that CBA pays dividends twice per year, so you should use the interim and final dividend to make a comparison.

One can't say that dividends pay a higher return than bank deposits. Some do, some don't. Banks usually do and some companies like Telstra pay over 9%. Other companies' dividends may be a lot lower.

What you should watch out for is the combination of capital gains and dividends. There is no opportunity for CG with bank deposits (and little possibility of loss too). The high dividends of some companies', like Telstra in particular, have not made up for their pathetic SP performance (Telstra T3 was at $7.50 I think, but they trade now around $3). Some companies have not only paid good dividends, but also have rewarded investors with a constantly increasing SP.

 

[Tyler Durden]

You are correct. The tax treatment is the same whether you take the dividend in cash or re-invest it in the DRP.

One negative that some analysts give against DRPs is that people tend to enrol and forget, accumulating more shares as the years go by. Some say that is bad decision making and that you should always actively assess whether to invest more in the company every time you get a dividend. Perhaps the best decision may be to hold off purchasing more (if the shares have become overpriced) or instead invest the dividend in some other company's shares.

Remember that CBA pays dividends twice per year, so you should use the interim and final dividend to make a comparison.

One can't say that dividends pay a higher return than bank deposits. Some do, some don't. Banks usually do and some companies like Telstra pay over 9%. Other companies' dividends may be a lot lower.

What you should watch out for is the combination of capital gains and dividends. There is no opportunity for CG with bank deposits (and little possibility of loss too). The high dividends of some companies', like Telstra in particular, have not made up for their pathetic SP performance (Telstra T3 was at $7.50 I think, but they trade now around $3). Some companies have not only paid good dividends, but also have rewarded investors with a constantly increasing SP.

Thanks, it all makes sense now I was a bit confused prior to this, as the general consensus seemed to me to be that dividends generally give ROI greater than the going interest rate offered by banks, so glad we sorted that out

 

[avexdevil]

yup that clears up any doubts I might have. cheers for the clarification