Author Topic: Dividends vs Dividend Reinvesting plans - Thoughts?  (Read 3764 times)

syednaeemul

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Dividends vs Dividend Reinvesting plans - Thoughts?
« on: February 03, 2016, 06:12:34 PM »
This may end up answering itself, but I'd like to know people's thoughts on signing up for Dividend Reinvestment Plans, which allow you to 'buy' extra shares instead of receiving dividends.

I see the following pros and cons to a Dividend Reinvestment Plan:

Pros:
  • Skip having to pay taxes
  • Shares have greater potential gain than cash (unless the cash can be deployed for better returns / the particular compayn is heading down the drain)
  • Some DRPs provide discounts

Cons:
  • Cash flow: not hitting me now, but if I relied on shares for cash, DRP wouldn't make sense
  • Share price dilution: being awarded bonus shares in a company will dilute the shares' value, which potentially means the 'dividend' is zero e.g. 1000 shares @ $3 becomes 1500 shares @ $2
  • Potential price downgrade: The overall share value may decrease (though it can also be a good thing as it means more shares are bought upon reinvestment)
  • Records keeping increases, as I would need to list down the purchase price on every dividend reinvestment for CGT purposes

Background: Right when the market decided to start the downturn, I pulled the trigger and finally bought some shares on the ASX (ANZ shares). They have a DRP program, and I'm close to signing up.

MDM

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Re: Dividends vs Dividend Reinvesting plans - Thoughts?
« Reply #1 on: February 03, 2016, 06:46:09 PM »
Pros:
Skip having to pay taxes
Sorry, you pay tax on the dividend regardless of what you then do with it.

Quote
Pro:
Shares have greater potential gain than cash (unless the cash can be deployed for better returns / the particular compayn is heading down the drain)
Con:
Potential price downgrade: The overall share value may decrease (though it can also be a good thing as it means more shares are bought upon reinvestment)
Yes, investments can go up or they can go down.

Quote
Con:
Share price dilution: being awarded bonus shares in a company will dilute the shares' value, which potentially means the 'dividend' is zero e.g. 1000 shares @ $3 becomes 1500 shares @ $2
Not sure of this point - are you saying that the company giving you bonus shares is bad?

Quote
Records keeping increases, as I would need to list down the purchase price on every dividend reinvestment for CGT purposes
Nowadays your brokerage will do that for you.  Excel also makes it relatively easy to do so yourself.


There are indeed pros and cons to DRP.  One can make a case either way, depending on the situation.

aspiringnomad

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Re: Dividends vs Dividend Reinvesting plans - Thoughts?
« Reply #2 on: February 03, 2016, 07:13:29 PM »

  • Share price dilution: being awarded bonus shares in a company will dilute the shares' value, which potentially means the 'dividend' is zero e.g. 1000 shares @ $3 becomes 1500 shares @ $2


Usually dividends are distributed in the form of cash. If you reinvest that cash in additional shares, you buy them on the secondary market and no dilution occurs. On this topic, though, companies that use nonreinvested capital for share buybacks (a sort of anti-dilution) instead of using it to pay out dividends, can return capital to shareholders without the tax hit generated through dividends. That's one reason share buybacks have become so popular.

marty998

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Re: Dividends vs Dividend Reinvesting plans - Thoughts?
« Reply #3 on: February 04, 2016, 02:39:29 AM »
This may end up answering itself, but I'd like to know people's thoughts on signing up for Dividend Reinvestment Plans, which allow you to 'buy' extra shares instead of receiving dividends.

I see the following pros and cons to a Dividend Reinvestment Plan:

Pros:
  • Skip having to pay taxes
  • Shares have greater potential gain than cash (unless the cash can be deployed for better returns / the particular compayn is heading down the drain)
  • Some DRPs provide discounts

Cons:
  • Cash flow: not hitting me now, but if I relied on shares for cash, DRP wouldn't make sense
  • Share price dilution: being awarded bonus shares in a company will dilute the shares' value, which potentially means the 'dividend' is zero e.g. 1000 shares @ $3 becomes 1500 shares @ $2
  • Potential price downgrade: The overall share value may decrease (though it can also be a good thing as it means more shares are bought upon reinvestment)
  • Records keeping increases, as I would need to list down the purchase price on every dividend reinvestment for CGT purposes

Background: Right when the market decided to start the downturn, I pulled the trigger and finally bought some shares on the ASX (ANZ shares). They have a DRP program, and I'm close to signing up.

- yes you still pay taxes (though with ANZ you'll get franking credits)
- yes thats quite well known shares outperform cash
- yes some provide discounts

- yes, doesn't make sense if you need cash
- you are only diluted if (a) you don't participate in a DRP where the company issues more shares, rather than a company that purchases shares on market to allocate to participants and/or (b) the DRP shares are issued at a discount
- share prices are influenced by many things, dividends are but one factor
- yes, record keeping does increase. MDM - in Australia your broker will not keep records for you, it is the responsibility of the owner of the shares.

syednaeemul

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Re: Dividends vs Dividend Reinvesting plans - Thoughts?
« Reply #4 on: February 04, 2016, 02:41:09 AM »
Thank you both, I overlooked the 'treated as a cash dividend portion' so yes tax savings is false, brokerage fees from buying shares direct is the only saving.

I think the TL'DR version is: if you have confidence that the base company is undervalued / will perform well, DRP.

MDM

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Re: Dividends vs Dividend Reinvesting plans - Thoughts?
« Reply #5 on: February 04, 2016, 04:34:04 AM »
- yes, record keeping does increase. MDM - in Australia your broker will not keep records for you, it is the responsibility of the owner of the shares.

Good to know - thanks!

It's also a relatively recent thing in the US.  As an alternative/addition to Excel, we used Quicken to keep track.  Took a few minutes every quarter to enter the DRP numbers so it wasn't onerous.

deborah

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Re: Dividends vs Dividend Reinvesting plans - Thoughts?
« Reply #6 on: February 04, 2016, 04:39:17 PM »
Bonus shares are quite different to DRP - with the DRP you have paid for shares with your dividend, so there is no dilution.

Occasionally, a company may want to create more shares, and it has share splits. For instance, many, many years ago the BHP share department was worried that they were never breaking through the $5 mark, so they decided to halve the value of every share and issued a 2 for 1 (giving every share holder two shares of half value for the one that the shareholders had). Within a year they were over $10. Obviously this devalues the underlying price of the share.

Sometimes the company makes a big profit and they decide to spend it on bonus shares for all share holders rather than issuing a really big dividend. This should not devalue the underlying price of the share.

I don't think it is advisable to DRP for three reasons. The first is that you are paying an unknown price for the shares - obviously they will tend to be a lower price because they are ex-dividend and you have no brokerage, but they might be high. Secondly, if you have decided to have an investment split - say 10/80/10 between three investments, the DRP changes the allocation over time - you are not deliberately putting your money into the right investment to keep the balance. The third reason is that you end up with all these little parcels of shares to manage, and work out your CGT (when you eventually sell).

mrpercentage

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Re: Dividends vs Dividend Reinvesting plans - Thoughts?
« Reply #7 on: February 04, 2016, 05:06:09 PM »
Dividend reinvesting allows it to compound and will purchase at times when you wouldn't but should.

Direct stock purchase plans can be a God send.

I will use Exxon as an example.
Zero account fee.
Zero purchase fee.
Fractional shares that allow you to be 100% invested.
Zero dividend reinvestment fee.
Zero annual fee.
allows direct deposit into your bank account for dividends
will send you a check for dividends if you prefer

Compare that to vanguard if you were to hand pick a stock (I think vanguard is exceptional for a broker so I am not knocking them)
$20 annual fee
$7 purchase fee
Zero reinvestment fee
Fractional shares for dividend reinvesting only

so if you wanted to do $100 every two weeks into Exxon it wouldn't happen. Couldn't do it.
If you purchased a $1000 worth you would have money left over because it doesn't do fractional shares on initial purchase (you would probably put whats left over in one of their funds)
so $20 annual fee is ~2% of your investment
the $7 fee is 0.7%
plus because you had to wait until you had a thousand (or ten or whatever) you could not take advantage of averaging in. You would be at the mercy of big moves either way

Retire-Canada

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Re: Dividends vs Dividend Reinvesting plans - Thoughts?
« Reply #8 on: February 04, 2016, 06:54:23 PM »
This may end up answering itself, but I'd like to know people's thoughts on signing up for Dividend Reinvestment Plans, which allow you to 'buy' extra shares instead of receiving dividends.

I don't do DRIP because I want the $$ to rebalance my portfolio and I don't pay to my investments. The only downside is not being able to buy fractional shares, but that typically leaves ~$20 - $50 uninvested across my accounts at any given time.

capitalninja

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Re: Dividends vs Dividend Reinvesting plans - Thoughts?
« Reply #9 on: February 04, 2016, 07:26:34 PM »
I get around this by keeping one mutual fund in the Vanguard account. Because they allow you to add money to them in fractional amounts, I'm able to keep all money invested. For example if I have 100 to invest and I buy 1 share of VNQ at $77. I can invest the remaining $23 in my mutual fund to keep all capital at work.

Just an option to consider.

Retire-Canada

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Re: Dividends vs Dividend Reinvesting plans - Thoughts?
« Reply #10 on: February 04, 2016, 08:36:28 PM »
I get around this by keeping one mutual fund in the Vanguard account. Because they allow you to add money to them in fractional amounts, I'm able to keep all money invested. For example if I have 100 to invest and I buy 1 share of VNQ at $77. I can invest the remaining $23 in my mutual fund to keep all capital at work.

Just an option to consider.

That's good way to deal with it. :)

I add money every month so it's not a big deal for me to top up the amount I need. The portfolio drag of $50 uninvested is not really worth thinking about it beyond that for me. I don't have any MF I want to own at this time.