Take the money or reinvest?

Hundreds of listed companies offer dividend reinvestment plans. It’s a chance to boost your shareholdings without dipping into your savings, but there are pros and cons to weigh up.

- NICOLA FIELD

A key attraction of investing in shares is the potential to earn regular, passive income through dividends. While a number of listed companies scaled back or suspended payments in 2020 to maintain precious cash reserves, dividends have been very much back on the agenda in 2021 and 2022.

A twice-yearly dividend is a welcome addition to many household incomes. But if you don’t need the cash, it can be worth thinking about a dividend reinvestment plan (DRP). It’s an option that lets shareholders take the value of a dividend in additional shares rather than cash.

DRPs are not limited to companies. They are also offered by exchange-traded funds (ETFs) and listed Australian property trusts (A-REITs). Many BetaShares ETFs, for instance, come with the option of a DRP. The basic principles, especially in terms of what to consider, are much the same across shares, ETFs and A-REITs.

WHY OFFER A DRP?

Companies have a compelling reason to offer a DRP. It lets the business hold onto capital rather than paying it out in dividends. This means more money to reinvest back into growth opportunities, which ultimately benefits shareholders.

Not all companies have DRPs. Among those that do, some are prepared to offer a discount on the shares swapped for reinvested dividends, letting shareholders get more bang for their buck (more on this later).

The real sweetener for many investors is an opportunity to save on brokerage costs. The extra shares provided through a DRP come straight from the company. This eliminates the need for broker involvement, so no broking fees are paid.