Dividend Re-Investment Plan (DRIP) – Take Cash or Shares?

Dividend Re-Investment Plan (DRIP) allows existing shareholders of the stock to choose between cash dividends OR reinvestment into additional shares (“bought” from the company) on the dividend payment date. Most DRIPs allow the option of taking additional shares, usually commission-free and at a significant discount to the current share price.

DRIPS of water forming an extensive resource pool

For investors, it also means automatic compounding of returns take place over the long term – when dividends are increased, shareholders receive more as the number of shares had increased. For the company, it creates more capital for the company’s deployment. Secondly, shareholders who opt for shares in a DRIP are less likely to sell their shares when the stock market declines as they recognise the role of their dividends play in their portfolio growth. Less cash distributed for a larger share base.

The big question for some newer investors is – When take cash? When take shares?

So far, my own encounter for DRIP most recently in the past few months are for Oversea-Chinese Banking Corp. Limited (O39) and Far East Hospitality Trust (Q5T).

Oversea-Chinese Banking Corp. Limited (O39)

“Oversea-Chinese Banking Corporation Limited (the Bank) announced today, in its Second Quarter 2019 results announcement, that its Scrip Dividend Scheme (the Scheme) will be applicable to the interim one-tier tax-exempt dividend for the financial year ending 31 December 2019 (the FY19 Interim Dividend) of 25 cents per ordinary share (Share). The Scheme will provide holders of fully-paid ordinary shares in the Bank (Members) with an option to elect to receive new Shares (New Shares) in lieu of the cash amount of the FY19 Interim Dividend. Entitlements to the FY19 Interim Dividend will be based on the Shares held by Members as at 5.00 p.m. on 16 August 2019 (the Books Closure Date).

For the purposes of the application of the Scheme to the FY19 Interim Dividend, the price at which each New Share is to be issued (the Issue Price) will be set at a 10% discount to the average of the daily volume weighted average prices of the Shares during the price determination period between 15 August 2019 and 16 August 2019 (both dates inclusive) (being the period commencing on the date on which the Shares are first traded on an ex-basis and ending on the Books Closure Date). The Bank will announce the Issue Price on 19 August 2019.”

Far East Hospitality Trust (Q5T)

FEO Hospitality Asset Management Pte. Ltd., as manager of Far East Hospitality Real Estate Investment Trust and FEO Hospitality Trust Management Pte. Ltd., as trustee-manager (the “Managers”) of Far East Hospitality Business Trust wish to announce that further to the announcement dated 30 October 2019 in relation to the application of Far East Hospitality Trust’s (“Far East H-Trust”) distribution reinvestment plan (“DRP”) to the distribution of 1.04 Singapore cents per stapled security of Far East H-Trust (“Stapled Securities”) for the period from 1 July 2019 to 30 September 2019 (the “Distribution”), the issue price of the new Stapled Securities to be issued under the DRP in respect of the Distribution is S$0.7090 per Stapled Security.

The issue price represents a 2% discount to the volume-weighted average trading price per Stapled Security for all trades on Singapore Exchange Securities Trading Limited (the “SGX-ST”) for each of the Market Days during the period of 10 Market Days immediately prior to, and ending on, the books closure date on 7 November 2019 (the “Books Closure Date”). The number of Stapled Securities to be allotted and issued to stapled securityholders of Far East H-Trust (“Stapled Securityholders”) pursuant to the DRP shall be rounded down to the nearest whole Stapled Security with the fractional entitlements disregarded, or otherwise dealt with in such manner as the Managers may deem fit.

What did I choose for both of the above?

I chose scrip dividends for both.

For 25 cents per ordinary share, my cash dividends should have been $125 for 500 shares. With DRIP, I had as scrip dividends 14 shares at $10.62 or $148.69 in equivalent cash. The good news is, fractional entitlements to a Share will be rounded up to the nearest whole Share for OCBC. We could see that taking shares was better than cash dividends.

For 1.04 cents per stapled security, my cash dividends should have been $54.56. With DRIP, I had as scrip dividends 72 shares at $0.69 or $49.68 in equivalent cash. The bad news is, fractional entitlements are disregarded and rounded down to the nearest whole Stapled Security for FEHT. We could see that taking cash dividends was just a bit on top of taking shares. However, we also had to note that this addition of shares was carried out commission-free.

Conclusion

There is no absolute advantage or disadvantage in taking cash dividends or shares to shareholders. It is more of a question of choice. Some investors swear off scrip for odd lots or for pure dividend play. If you have better deployment of the cash dividends, you may opt for cash. As for me, I prefer to build up my positions in fundamentally strong companies for the long run.

Do you generally take cash or shares from a DRIP?

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