Making sense of DRP schemes

Making sense of DRP schemes

Dividend reinvestment plans (DRPs) might be an enforced way of ensuring you don’t fritter away your dividend cheque every six months, but it may no longer have broader appeal it once did within less volatile bull markets, when interest rates and brokerage fees were both high.

To the uninitiated, DRPs simply give shareholders the opportunity to purchase additional shares with their dividend payment instead of taking cash.

More often than not, these additional shares can be purchased at a slight discount to market.

The workings

For example, Toni has 10,000 shares in Aussie Wigits Ltd which pays a fully franked dividend of $0.95. Aussie Wigits Ltd offers a 2% discount on shares purchased through a DRP scheme.

Assuming the price of Aussie Wigits Ltd shares was $34 at payment date, Toni would receive 285 shares, and the 2% discount means she has greater exposure to the stock with six additional shares she wouldn’t otherwise have.

At face value, that’s great a great outcome for Toni. As well as cost-effectively automating the reinvestment of her dividend - without incurring brokerage fees - the power of compounding returns will also contribute directly to her long term wealth.

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