How to enter a Dividend Reinvestment Plan

If you have ever wondered how easy it is to sign your share holding up to a Dividend Reinvestment Plan then this is the article for you. 

Dividend Reinvestment Plan

What is a Dividend Reinvestment Plan?

A Dividend Reinvestment Plan (DRP) allows an investor to automatically reinvest the cash dividends that would have been paid back into that same company. Once the investor signs up, the company automatically purchases shares on your behalf until you opt out.  Investors find this incredibly enticing as they set and forget, whilst the share holding can increase over multiple years. Due to the compounding power, an investment over a multiple year period can show exponential growth. 

How do I sign up to the DRP?

The easiest way to sign up to a DRP is through the online share registry. 

Step 1. Find out which registry your shares are held with and log in 

Once you find this out then simply head to the website. Each website has an option on the home screen to Log In to access a single holding. Click on that link and then you are left at the sign in screen. 

Step 2. Sign In

All you need to sign in is the following details
– Shareholding ticker code
– Name
– Post Code
– Captcha Code

One of the area’s I always get wrong is the HIN/SRN. If the registry isn’t allowing you to sign in then double check that you have put the correct details in.  Sometimes the SRN/HIN drops a 0 or a letter based on the registry. 

Step 3. Click on Reinvestment Plan option

Once you are successfully signed in you need to follow the website through to the Reinvestment Plan screen where you need to click on edit instruction.  Once you are on this screen you can select how you want your reinvestment to occur. There are three options. 

Full Participation –100% of the dividend is reinvested into the company. This is based on your total holding of the company even if you purchased multiple parcels over different months. 

Part Participation –The investor selects the number of shares that will participate in the DRP, the remaining portion of shares is paid out in cash as if they were not participating. With the additional shares acquired these will default into the non-participating portion unless the investor adjusts the reinvestment plan option. 

No Participation –The investor does not which to participate in the DRP and will be paid out the dividends in cash. 

Step 4. Confirm 

Click confirm and you are done! From now on based on your instructions you will either be fully, partly or not at all participating in the Dividend Reinvestment Plan. 

Can you be paid part shares based on the number of shares you held?

Yes – you can be paid part shares. Lets talk through this example to show you how.

Say the share price is $11 and you own 10 shares.  The dividend payment is 5% of the share price that is $ 0.55 of a dividend payment. Therefore once you sign up to the DRP plan then you will receive 0.55/11.00 or 5% of a share to your shareholding, now your shareholding increases from 10 shares to 10.05 shares.  Then at the next dividend payment your new dividend is based on the new shareholding of 10.05 shares instead of the original shares (and so on and so forth). This process can go over many years. 

What are the benefits of DRPs?

A DRP is very helpful to the investor if they want to increase their shareholding in a particular share. The DRP process is very automated and involves no involvement by the investor once they set it up. 

The other advantage is that the investor can take advantage of dollar cost averaging which means the investor is not buying shares at the peaks of the share fluctuations, they are instead buying them all throughout the cycle of the share price and the average price of the shares acquired is lower. 

Given that you normally pay commission and transaction costs when you initially buy a share holding, these costs are not in place for DRP plans, and sometimes the DRP is even at a discount of the actual share price enticing investors to reinvest their dividends to acquire more shares at below market conditions. 

The last advantage is due to the compound nature of dividend yields and reinvesting. Once the investor signs up and his shareholding slowly increases year on year, the compound effect will mean the share holding grows exponentially after several years of growth.  

What are the disadvantages of DRP?

The main disadvantage of DRP is that investments which may have been performing well when you first acquired the shares, are no longer performing well and you would be better off being paid the cash dividends and reinvesting the dividends into other shares on the market. Therefore the investor needs to constantly assess whether the share is still performing well and whether they still want to be signed up to the DRP plan. 

Is Dividend Reinvestment a good idea?

This is a tough one as it depends on the personal situation of the shareholder and the entity itself. You need to consider the advantages and disadvantages listed above to ensure it is a good idea for your situation. 

Do I need to declare Dividend Reinvestment Plan shares on my Tax Return?

Yes – If you are participating in a dividend reinvestment plan then the additional shares acquired are treated as if you had received a cash dividend and then used the cash to buy additional shares.  There are a number of other conditions here based on your own local tax authority regulations. 

Is there other ways to sign up to a DRP?

Now from my experience when I have signed up to a share holding, you receive two letters one from the clearinghouse, and one from the company. There are instructions on the forms on how to sign you up to the DRP – but the ones I have seen have always given the link to the market service provider website i.e. LinkInvestor or ComputerShare. 

Disclaimer– The information on this website is for general information purposes only. It is not intended as legal, financial or investment advice and should not be construed or relied on as such. Before making any commitment of a legal or financial nature you should seek advice from a qualified and registered legal practitioner or financial or investment adviser. No material contained within this website should be construed or relied upon as providing recommendations in relation to any legal or financial product.