Differences between Scrip Dividend Scheme (SDS) and Dividend Reinvestment Plan (DRIP)

Most recently, I elaborated on understanding the Scrip Dividend Scheme better and shared my choices for the Dividend Reinvestment Plan — OCBC Bank (O39) and CapitaLand Retail China Trust (AU8U). I had erred on the later, it should be corrected as Scrip Dividend Scheme (SDS), and not Dividend Reinvestment Plan (DRIP).

SDS and DRIP look the same, sound the same; but they are not synonymous.

What is common between Scrip Dividend Scheme and Dividend Reinvestment Plan?

Both allows existing shareholders an opportunity to increase their shareholding over time by adding shares in lieu of cash dividend.

What are the differences between Scrip Dividend Scheme and Dividend Reinvestment Plan?

Scrip Dividend Scheme reinvests the dividend at a fixed share price, called the Issue Price, which is announced in advance of the dividend pay-date. Dividend Reinvestment Plan reinvests the dividend at the prevailing share price on dividend pay-date.

Scrip Dividend Scheme usually creates new shares (and sometimes from treasury shares or shares in the company’s reserve). Dividend Reinvestment Plan buy shares from the open market. Therefore, SDS usually cause shares dilution for existing shareholders who do not opt for scrip while DRIP does not lead to share dilution.

Scrip Dividend Scheme allows the issuing companies to retain cash as working capital or for future growth etc. as shareholders opt for scrip instead cash for dividend payout. Dividend Reinvestment Plan offers no similar advantages to the company; it just pools the cash dividends payable to shareholders who opt for shares and purchases the shares from the open market on their behalf.

Shares under the Scrip Dividend Scheme are issued by the company. There is therefore no additional cost; stamp duty, brokerage commission, exchange fees or other transaction cost. Shares under the Dividend Reinvestment Plan is considered a trade; the shares are however purchased at a very competitive commission rate. Stamp duty is applicable.

Shares under the Scrip Dividend Scheme are allocated on the dividend payment date in lieu of cash dividend. As it is a trade under Dividend Reinvestment Plan, normal settlement rules apply (e.g. T+2 on SGX), therefore a delay in the shares appearing on the register.

Side note

Some brokerages offer some sort of DRIP or reinvestment scheme. POEMS Share Builders Plan (a Regular Savings Plan account) reinvest the cash dividends into your preferred counter by default, instead of withdrawing the cash dividends from the account.

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